The Motley Fool - Delaying the Inevitable

Dangerously Delaying the Inevitable
By Morgan Housel
July 2, 2009 | Comments (44) Comments are as valuable and interesting as the article

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The Obama administration relaxed the requirements for government-backed mortgage modifications yesterday. The program, a $75 billion assistance plan announced earlier this year, originally allowed homeowners with loan-to-value ratios up to 105%qualify for refinancing, provided the loan is backed by Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE). That limit has now been upped to 125%.

The rationale here is simple: As home prices keep nosediving, more and more homeowners are grossly underwater (they owe more than their home is worth). The original mortgage modification program was failing to help as many people as Washington wanted.

And focusing on housing makes sense from a recovery standpoint. This mess started in housing, and it'll surely end there. The root pain of everyone from Citigroup (NYSE: C) to Best Buy (NYSE: BBY) to Home Depot (NYSE: HD) is all linked back to housing in one way or another. As Warren Buffett recently noted, fix housing and "the world will change in a big way."

But -- and this is a very significant but -- past evidence of the effectiveness of mortgage modifications is really, really atrocious. A recent report by the Office of Thrift Supervision and the Comptroller of the Currency detailing the amount of redefaults, or troubled loans that find their way back into default after modification, shows just what I'm talkin' about.

Of the modified loans 30 or more days delinquent, here's what it found:

Modification Date (2008)
Three Months After Modification
Six Months After Modification
Nine Months After Modification
12 Months After Modification

Q1
40.4%
53.0%
59.9%
63.3%

Q2
46.6%
58.8%
61.1%
--

Q3
50.4%
59.5%
--
--

Q4
45.9%
--
--
--


Source: Comptroller of the Currency, Office of Thrift Supervision, June 2009.


One year out, over 60% of modified mortgages end up where they started … in default. What's really amazing is how quickly things reverted: Just 90 days after modification, almost half of mortgages were back in default. That's utterly pathetic.

Rising joblessness is the most obvious answer to why so many modifications fail. But that alone hardly accounts for the ungodly redefault rate. When unemployment goes up a few percentage points while redefaults hit 60%, something else is surely at play.

And it is
One of the big factors fueling redefaults is just what the Obama administration seems to be pooh-poohing: underwater homeowners.

When your house is worth less than your mortgage, there's a huge incentive to give up and walk away even if you can make your monthly payments. The logic here is simple: The beauty of homeownership is based on a saying that goes something like "with every mortgage payment, you'll own a little bit more of your house." But when you're underwater, the only thing you "own" is the liability. Monthly payments decrease your debt, but you still don't own one inch of the house. The bank does.

Taking away this fundamental sense of ownership zaps the incentive to keep making payments. The sensible thing to do, many find, is to stop paying and walk away. This is suicide on your credit rating and a nightmare for housing-heavy banks like Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC), but the pros often outweigh the cons. When the job market is this tight, becoming mobile again is worth its weight in gold.

When it comes down to it, high monthly payments aren't what are pushing many homeowners into default. It's the fact that their mortgage balances are so high that it doesn't make sense to keep making payments.

Moving on
Now back to our Office of Thrift Supervision report. In the first quarter, a scant 1.8% of modifications actually reduced mortgage principal -- the kind of alteration that entices underwater homeowners to keep making payments. Most were interest rate reductions, or capitalizations of missed payments and fees. The latter is literally just taking debt you owed yesterday and tacking it on to what you'll owe tomorrow. Sober people think this is an effective way to solve an excessive debt problem. Honestly.

And that's why the redefault rate is so high: Underwater homeowners are still highly incentivized to default, even with reduced monthly payments. And as home prices fall, their ranks are growing by the day. Modifications in their current form are, more often than not, just delaying the inevitable.

This all loops back to a painful reality: The only way to climb out of the housing mess is to let prices find a true bottom. Ultimately, that means those who bought homes they could never afford will have to bite the bullet and move on. There's really no way around that.

For related Foolishness:

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Best Buy is a Motley Fool Stock Advisor recommendation. Best Buy and The Home Depot are Motley Fool Inside Value selections. The Fool owns shares of Best Buy and has a disclosure policy.
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Report this Comment On July 02, 2009, at 10:52 AM, boiler6764 wrote: Great article, I totally agree. I just sold my house and had to write a $40,000 check to do so. What really bothered me is that there are all these incentives for people who did the wrong thing, but no rewards for those who are trying to do the right thing, even to pursue a short sale you had to be late on your mortgage payments.

I really thing a big step toward reaching a market bottom is simply to allow people to take a capital loss on their home sales. It encourages people to take the loss on their sale instead of walking away. The bank gets full payment on their loan and a bank gets to finance the house at a market-appropriate value. Things like short sales hit people's credit, so it makes them unlikely to buy a house in the near-term, taking a buyer out of the market. On the other hand, allowing capital losses allows a home seller to recover from their losses more quickly so that they can re-enter the housing market while maintaining their good credit. It has a huge multiplier effect for the government, for example in my case where I could take a $40k capital loss, that would cost the government about $11,000 (assuming I was in the 28% tax bracket). The bank gets full payout (~$150,000) on one loan and makes another loan at market value (~$122,000), replacing a liability into a good asset.

Report this Comment On July 02, 2009, at 11:15 AM, negrodamus wrote: Amen. The points you make seem to be lost on everybody - that a lot of people sunk a huge portion of their income into real estate *as an investment*. Now that real estate isn't turning out to be the money-making machine that everyone hoped it would be, people want out. They'd gladly live in a cheaper place and invest a portion of their money elsewhere. Even if the house prices were magically reset to their peak from a couple of years ago, as long as the expectations that they will keep rising is not there, the prices would naturally come down. Not much different than a stock with an astronomical P/E ratio where the management predicts flat earnings for years to come...

Sadly we'll have to double-dip here soon, but hopefully in a less panicky manner.

Report this Comment On July 02, 2009, at 11:20 AM, MKArch wrote: Totally disagree on the "current" value of the house being the problem with loan modifications. The problem with re-defaults is trying to work with borrowers who have a history of not repaying their debt and never should have received a loan in the first place. They aren't making their payments because that's what they do borrow money with no intention of paying it back. If the government is willing to help them not pay their bills a little longer all the better. The flippers and speculators that would be worried about the re-sale value of the house are long gone the current crop of re-defaults are deadbeats or someone who lost their job and can't pay. Joe Six Pack doesn't even know what the "current" value of his house is and the vast majority of responsible home owners bought their house to live in it not as an investment. They are not reading the real estate section every day trying to figure out when to walk. Where are they going to go anyway?

Report this Comment On July 02, 2009, at 1:27 PM, Seattleguy527 wrote: This is a complex problem, and unfortunately it's true that a lot of people are walking away from the mortgages lately. However, I don't know that just letting everything collapse is the right answer. What a lot of people don't realize is that there are tons of adjustable rate mortgages scheduled to reset this year. If you think the housing market is flooded with short-sales and foreclosures now, just wait until these ARMs reset later in the year. The obvious answer is that these borrowers need to refinance before their ARMs reset, but if you're "underwater" there aren't many, if any, banks that will refi your loan. I understand the resentment towards people not paying their mortgage, but how does a housing market that is inundated with short-sales and foreclosures help matters? That will only result in home prices dropping further, which will result in more underwater borrowers, which will result in more short-sales and foreclosures.

As for investing in real estate? I think it's a fantastic investment. While it's true the housing market has been crushed the last few years, that doesn't change the fact that investing in real estate is one of the best ways to build wealth. To say that investing in real estate is a bad idea because of the recent housing problems, would be like saying investing in the stock market is a bad idea because of the recent slide in the last year or two. Both markets are highly cyclical, and both markets provide a great way to build wealth, in the long-term.

Just my .02.

Report this Comment On July 02, 2009, at 1:52 PM, mistermiranga wrote: "To say that investing in real estate is a bad idea because of the recent housing problems, would be like saying investing in the stock market is a bad idea because of the recent slide in the last year or two."

-I don't think anyone is saying that...real estate is a fine investment if you can afford to make the payments without relying on appreciation. at least in stocks you can only leverage with collateral...when you go under water you immediately recognize the loss.

The article brings up outstanding points. The government is probably just throwing more good money after bad.

Report this Comment On July 02, 2009, at 2:22 PM, outoffocus wrote: I just commented in another blog yesterday that until the administration figures out that the only people who will bring us out of this housing slump, we will have a long, slow, painful housing recovery.

While they are trying to keep people in homes they can't afford, they are not allowing houses to fall far enough for renters to afford.

Report this Comment On July 02, 2009, at 2:37 PM, clanza875 wrote: Its fairly simple, wages have not kept up with house prices so something has to give. Either houses keep coming down or wages have to increase. Amazing enough there are some areas where your money will do better in us treasuries than to buy real estate and rent it out.

Report this Comment On July 02, 2009, at 3:35 PM, MKArch wrote: Just some food for thought about simple legislation that could have prevented a good part of the crisis to begin with and could help prevent another one in the future. Foreclosures get divided into two camps: Chose to walk and Financial distress. Chose to walk remains on your credit reports for life. Financial distress gets expunged in 4-7 years.

I still think chose to walk did so long ago as the writing has been on the wall for a couple of years and there would have been no sense hanging in this long if walking was merely an investment decision.

IMHO the bulk of the re-defaults are irresponsible borrowers that were probably life long renters used to staying current for a little while on their rent then falling behind milking the system to stay put as long as possible before ultimately moving on to the next rental. Getting a mortgage they never deserved in the first place is just like the next rental to them. Make your payment for a little while then stop payments and milk the system before moving on.

The one thing I agree with Morgan about is the government is just delaying the inevitable and costing everyone money by trying to keep people you know are irresponsible in the house. Where I think he is going with this and I disagree is people with good credit that hung in this long but are underwater are going to be walking. IMHO the looming ARM resets have by and large already walked or have re-financed and this worry is going to turn out to be greatly exaggerated. The vast majority of new defaults will be due to financial distress and will dry up when job losses dry up.

Report this Comment On July 02, 2009, at 3:38 PM, BMFPitt wrote: Just one more painful reminder that failure will continue to be rewarded in the name of keeping house prices unaffordable.

Report this Comment On July 02, 2009, at 4:00 PM, MKArch wrote: Sorry to drag this out but I just thought of a good analogy. The purchase of an automobile is a big investment for most people that is substantially under water the second they sign on the bottom line. Practically everyone who buys an automobile is under water from the get go, how many turn in their keys because they are under water? While everyone who buys a house or car is looking to get the best deal possible and the purchase is an investment from that perspective the decision to sell is infinitely more complex than the current market value.

Report this Comment On July 02, 2009, at 4:23 PM, Seattleguy527 wrote: MKArch,

You make some very good points. However, one thing that I think needs to be noted re: borrowers with ARMs, is that a lot of them don't even realize their mortgage will adjust. That may sound crazy, but very few borrowers educate themselves when getting a mortgage. It's a completely foreign language to them, so they put their trust in their broker/loan officer because they are the "expert." Unfortunately, there are irreputable brokers and loan officers who take advantage of people like that. Whether that means conveniently not mentioning that the rate will adjust, or just flat-out lying and telling them their rate is fixed, it's something that has happened quite a bit over the last few years. And even if they know their rate is going to adjust in a few months, if they had an LTV of 95% when they bought the house 3 years ago (which was very common back then, and many homes were bought with 100% LTVs), they simply CAN'T refinance if they owe more than the home is worth.

Granted, with the publicity and media coverage the "mortgage meltdown" has received recently, I would hope more borrowers today know the terms of their mortgage than, say, 3 years ago. I do think it's worth noting, however, that many, perhaps most borrowers, rely solely on the advice of their broker.

I hope you're right about the ARM resets not having a big impact, but I'm very skeptical. In the area I live in (Seattle), the majority of homes on the market are either short-sales or foreclosures. I would venture to guess somewhere between 70-80%. The irony of that is, at least from a national perspective, our housing market hasn't been hit that hard... yet.

Report this Comment On July 02, 2009, at 4:56 PM, MKArch wrote: Seattleguy527,

While I'm sure there are some cases of unsophisticated borrowers being duped I think the extent of it is greatly exaggerated. People are not as dumb as politicians and pundits want you to believe. It's been a few years since I did my last loan but the broker is required to explain the terms in layman's language and I think the truth in lending statement explains them as well. IMHO the reports of predatory lending are mostly political in fact the re-default rate is pretty much evidence of this. Also IMHO the anecdotal consumer complaints are mostly excuse making from irresponsible borrowers that shouldn't have received a loan to begin with or at best cherry picked examples not representing the norm.

Report this Comment On July 02, 2009, at 4:56 PM, regulatethem wrote: Real estate will always be a good investment for some people, depending on timing and locations. It's always a question of price and how much you are willing to spend. People should wait until they have stable jobs before buying properties. I don't think the 125% makes sense. It just encourages things to fester, that will be inevitable and dealt with again later.

Report this Comment On July 02, 2009, at 5:02 PM, GeoffreyLindleyS wrote: What a sorry state of affairs that purchasers of the largest acquisition most of them will ever make don't take the time or have the intellectual ability to understand what they're doing when they sign-off on a mortgage. A good bit of today's chaos in the real estate market is directly related to that level of incompetence!

Report this Comment On July 02, 2009, at 5:06 PM, rgardner101 wrote: I moved from Houston,Tx. 20 years ago following a personal bankruptcy. I managed to hang on to my house in Tx, owing more than it was valued at. I rented out for 13 years just to cover the note each month.

in the end I sold it clearing 55,000 $ .

These things just take time ,there is no quick fix.

Report this Comment On July 02, 2009, at 5:20 PM, modeltim wrote: I don't see anyone here addressing the responsibility the financial industry bears for the very large majority of the financial mess we're in. Banks that are too big to fail are too big to exist. Citi, BofA, et al are already largely owned by the taxpayers. There are virtually trillions of dollars, funny money if you will, that these effing banking geniuses don't know what to do about but they just want to be bailed out and blame it all on the little mortgagee little guy. I'm all for invoking Sherman Antitrust laws to break these mfers up and invoking something quite similar to what was done during the 80's by creating a new Resolution Trust Corp. or doing what FDR did during the depression. Geithner and Summers and all of congress are in the pockets of Wall Street. F em all!

Report this Comment On July 02, 2009, at 5:20 PM, BruinAlum77 wrote: MKArch and others have made comments about what they THINK is the make up of the homes in default. Either they are speculators, or renter dead beats, or ignorant borrowers, etc. It almost seems as if ones political views are projected on to who these default borrowers are.

The reality is the market is made up of a number of different borrower profiles, and any legislation to reduce foreclosures should take that into account.

People who bought with interest only loans knew they would have to refinance, hoping that the rise in prices would give them equity. Do they deserve to be bailed out? I don't think so, unless the numbers end up harming the economy to such a degree that we have no other choice, as we did with all the scum bag banks who caused these problems in the first place.

But what about people like my neighbor? She used the equity of her last home, about $250K, to buy a bigger house with an ARM. She's going to lose the house on a short sale. Does anyone think she would walk away from her house because she's underwater? This seems like a pretty good criterion for loan modification - anyone who lives in a house that they put their own money into.

Report this Comment On July 02, 2009, at 5:38 PM, Big50Shooter wrote: GREAT article Morgan... Nice comments from all of you above too!!! Obama should hire all of US to figure this situation out! LoL...

My take:

Major problem is allowing the government into the fray to "fix" this housing/mortgage problem in the first place. I think many above brought up the point of rewarding irresponsibility, and these mandated readjustments are doing exactly that. People and BANKS made HUGE mistakes in writing these loans, so they should be left to figure this problem out for THEMSELVES!!! Housing was WAY over inflated, everyone could see it, and we all got stupid with the basics of financial responsibility and some of us "fell for it" with the pitch that "houses ALWAYS appreciate/ homes are a great way to make & save money/ you can NEVER lose with real estate/ blah blah blah...".

NOT!!!

Another factor allowing this problem to grow is the governments willingness to change legally binding agreements (mortgages) for what is essentially emotional reasons... Boiler6764 above is a PERFECT example of why this activity should not be allowed to continue. Boiler may have fallen for the fiscal irresponsibility from the beginning, but he made it right even thought I am sure that was a VERY painlfull thing to do.. (Boiler, I personally give you HUGE kudos for following through with your responsibility!!!). The problem is that now the gov. has essentially given its' blessing to "walk" from a mortgage, so the downhill pace of home devaluation picks up speed. The people who intitiated the pain by buying what they had no business buying have no repercussions for their actions (they used to get 1099'd from the IRS for the difference in value when they walked from a note, which WAS a huge deterrent..). Now, when people walk, banks get stuck, and WE innocent taxpayers get drawn into the fray OR we risk the solvency of our banking institutions... Since much of this is their own fault anyway, by allowing banks to get the shaft, justice can be served and we all will be assured that they won't allow that to happen in the near future... Yes, people will go homeless and/or bankrupt and some banks WILL go under, but the housing prices will reach their own stability or bottom as it may at a much faster pace and the taxpayer who was RESPONSIBLE for their financial house (pun intended) won't be stuck paying for others mistakes...

The free market is a wonderful thing... It's doesn't make these recent unpleasantries any more "pleasant", but that's why they are called UNpleasantries. Until somebody (banks and homeowners) learns a lesson on WHY they should avoid the UNpleasantries by not being irresponsible, nothing will go forward...

Market "up" or not, I am still VERY bearish on our country's economic condition for at LEAST the next year or so... Housing prices will continue to drop all the while...

Personally, I think we have another 5+ years until we see any decent growth figures in our economy... It's going to be a cold-cold winter this year.....

Report this Comment On July 02, 2009, at 5:51 PM, Wyoming123 wrote: Imagine this --- work for years, save money for years and buy your house with cash. The "conventional wisdom" says not to do this but the so-called wisdom is wrong. We worked and saved for years and did not buy a house until we were 42 years old. We rented CHEAPLY until we had the money to actually BUY a house. Now we have only taxes, insurance, homeowners and maintenance - much less expensive than having a loan payment too. I know people will say that this is not the way to go because of the present/future value of money, but when you know your house is PAID FOR you have NO WORRIES. Imagine this -- the bank gets only what they can earn while you are saving the money and you do not make payments. THEN if you lose a job, become invalid, go blind or whatever, you still have your HOME and it does not matter how much it is "WORTH".

Report this Comment On July 02, 2009, at 6:51 PM, mamallamainvest wrote: Really great discussion. I so agree!

I also just sold my home. I didn't make much, but after 10 months of unemployment, I figure getting it sold in less than 40 days and still putting money in my pocket is not a horrible place to be in. Unless you consider that I bought the house in 1993 - for a third of the sale price and have been making payments ever since. I should have pocketed a ton of money or at least had to fight with my ex over what was his share, but I didn’t, I didn’t even make as much as the realtors (gosh bless them though they got it sold).

Yep, I paid off a huge debt that had been rung up over the last 10 years by a now ex-spouse who decided the increasing value was a way for him to deal with his spending problems. Since I poured over $50,000 into the place 2 years ago, in an attempt to reduce a portion of that debt, it was rather tempting to just say the heck with it, pocket the payments and walk away. However, my ethical side took over and I decided not to join the rest of “crying over the milk they deliberately spilt” crowd and took the high road by selling it and paying off the last of debt. There is also the fact that I believe we are in for a further reset on housing prices. Sorry, but I really think we are going to see, in fact need to see, another round of decreased values before we can start to heal the housing market. I would just assume not be holding a mortgage when that happens.

However, the real point here is that a lot of these homes were not just bought over valued but that homeowners worked their way up to that point chasing a pipe dream that everyone should have learned in the early 80's was the product of the mortgage and realty industries over active imaginations regarding ever growing home and property values.

Guess what, there is a ceiling, housing and land just won’t keep increasing in value forever (well maybe, if the value of the dollar just keeps dropping like a stone). We’ve been here before folks. Anyone else live through the housing nightmare of the mid 1980’s (over valued homes, ARM's from heck, 0 down payment loans)? We should have learned our lesson but didn’t and we have no one to blame but ourselves. Whether we are the over leveraged owners or the jokesters who kept giving out the money to anyone who would sign on the dotted line we bought a pipe dream and now we have to pay the price.

Report this Comment On July 02, 2009, at 6:54 PM, Seattleguy527 wrote: MKArch,

I work in the industry as well, and I can only give you my firsthand experience. I have had scores of people tell me they were duped by their brokers on their mortgage. Now, the first thing that pops into my head is "were you actually duped by your broker, or did you not do your due diligence and feel as though you need to find someone else to pin it on to save face?" Unfortunately, I think both of those scenarios happen more than people realize. Maybe not as much today since so many people have come under fire, but a few years ago I think it was fairly common.

And you're correct, every broker is supposed to lay everything out in layman's terms to their borrowers. Unfortunately, that doesn't always happen. And the initial disclosures that the broker has to include (i.e. TIL, ECOA, etc.) are oftentimes signed by the borrower after quickly scanning, or possibly not even reading the document. So again, although it may sound silly, the borrower is giving their 100% trust to the broker and just doing whatever he/she says. I have found this to be especially true in sub-prime scenarios where borrowers are desperate and just want someone, anyone to help them.

Ultimately, I don't look at these types of borrowers as being dumb. I think they are ignorant and naive. They assume that if they pay a professional to help them secure a mortgage, that person will always be looking out for their best interest. I'm not making excuses for them because I'm a strong advocate of doing your homework, especially when it comes to the biggest purchase of your life, but I don't think all borrowers who go into default are doing it maliciously.

Just my thoughts...

Report this Comment On July 02, 2009, at 7:19 PM, fallwater wrote: If gov. guarrenteed loans are lowering monthly payments and these are comperable to rentals, why would anyone choose to walk, unless there shacking up with family and not pay a cent for rent.??? The situation is complex.I like the senario to hit bottom so as the economy can than rise/recover from there.

Report this Comment On July 02, 2009, at 8:32 PM, ds10 wrote: IF you can purchase a home with cash, your own savings, then do it. Don't take out a loan.

The decision is basic: take a loan ONLY if the money

earned monthly on the cash you would have used to buy the house is greater than the total monthly loan

repayment. And this situation is rarely, if ever, possible. Sure, you will have to delay home-ownership

but this financial security is well worth it.

Report this Comment On July 02, 2009, at 10:07 PM, 1PaganLady wrote: I've found this discussion very interesting. In Dec '99 I'd cashed in stocks to purchase my home in Gig Harbor, WA outright - against the advice of my stock broker (of course), real estate broker, and on down the line. I heard "never use your own money when you can borrow from someone else" ad nauseam but my thinking was very similar to Wyoming123 & ds10. Especially now, I believe it's quite possibly the only thing I've done right! Nobody is reimbursing me for mistakes I've made in the market, and I also agree with Big50Shooter - I shouldn't have to pay for others mistakes.

Report this Comment On July 02, 2009, at 10:41 PM, booyahh wrote: The author is right: lately there has been a "prime" mortgage crisis. Two of my friends in Orange County foreclosed on their homes because their loans were significantly larger than the current market prices. The banks stubbornly refused to re-negotiate, so they just moved out. Both of these people make roughly 120k per year. After foreclosing, they now save 5k per month (after rent) and are much more optimistic about the future.

Report this Comment On July 02, 2009, at 10:42 PM, rsenor wrote: Mr. Houssei fails to point out the second report from this OCC and OTS mortgage report, and that is the percentage of borrowers re-defaulting after 90 days of delinquency. That percentage is considerably lower across the board:

http://files.ots.treas.gov/482047.pdf (page 29)

The percentage of borrowers defaulting on any credit item is very high when you look at the 30 day benchmark (day late on your payment? You fall into that first report). Even the best of us have even been there.

To me, what this shows is that banks are being forced to be smart at the outset, and determine those buyers that will likely not pay in the long run, and focus only on the ones who can. Which means Banks will need to spend more money on things like predictive analysis of the default potential of their borrowers.

If I say something and you can't hear me, is it because I didn't speak loud enough or you weren't listening carefully enough?

Regardless of whether the fault was of the bank or the buyer, we all need to be more prudent now and the original report Mr Houssei quotes is a wake-up call that banks simply need to be smarter about how they lend money.

Report this Comment On July 03, 2009, at 12:37 AM, douggieboy wrote: I've been screaming for a dozen years about the root cause of the ever-accelerating collapse of the banking infrastructure in this country, and predicted with utmost precision what would happen, how and why-- and it has come to pass. Sorry to say, the worst is yet to come.

If you click on the "discuss" link for the company, Fair Isaac, who was [and still is] the architect of economic ruin this nation is now facing, you will see two postings I made, one quite recently, and the other in early 2008, describing how corporate greed, backed by bribery,, er, I mean- "lobbying" lawmakers in Washington set the stage and drew the blue-prints of a patently defective Marxist computer models, to be given absolute control over the lending industries in the US. Detail of FICO scoring's inception, leading to its universalization as the only parameter used to determine a potential borrower's credit worthiness, is enumerated on my website, www.ficovictims.com. At the bottom of the page you'll find links leading to a few other sites, where I began posting in 1997. No one has ever listened; letters, phone calls, emailing, and even the occasional personal visit to the offices of political constituents, had rendered no results. A senator from Connecticut brought up this issue in a session of Congress, and was quickly squelched. In no uncertain terms, he was told to shut up and butt out, or he'd be out on his butt.

Read, and judge for yourself. Contact me if you have any clout or influence in high places, where someone might look at my data and make a correlation to fact.

Every last claim I make is correct, and every event I predicted, which is leading this country into ruin, and the Federal Reserve into upcoming insolvency, along with tax-payer funded bailouts for greed mongers, a rate of foreclosures and bank failures not seen since the Great Depression of 1929-1937. What's headed this way next is going to make the Dust Bowl Days look like a black tie Cotillion.

FICOVICTIMS.COM, and I welcome all feedback....

Report this Comment On July 03, 2009, at 1:41 AM, bigalf123 wrote: I agree 100 % . People that walk every chance they get tend to worry a lot more about money than they do about personal carractor. Even our largest companies will tell you that corporate ethics are differant than moral ethics.I guess the new grduates of these corporate ethics classes are finally graduating and implimenting what they have learned . The good news is that if you are from the old school and pay your bills,live with in your means,and respect and honor your commitments,you probably did not get to far into this mess we are in and you can sit it out.Who knows , maybe we can pick up a house cheap, o ya I forgot we are supposed to make up the differance in price so the rich don't loose any money and the looser's can walk away.

Report this Comment On July 03, 2009, at 4:08 AM, mottyhall wrote: As a Brit, we now have our last coin of the realm being minted with the Brittania symbol on it.

We once ruled the waves and the world but were taken over by one of our uncles whos name i believe is Sam but he now has cancer and is dieing. He to was a big man but we all end up six feet under no matter how big we are

Report this Comment On July 03, 2009, at 12:14 PM, rsenor wrote: There are actually companies out there that make much smarter and sophisticated analytic models that take not only credit score but also hundreds of other criteria into account, not just a simple score.

My point is that this article shows a completely limited and subjective view of this issue and that is this: Foreclosure proceedings can occur at 90 days delinquent. Not 30. This same report shows 90 days delinquent at 43% defaulting/57% cured: a full 20% points lower than what Houssei quotes here!!

While statistical models might not be perfect, they are getting smarter all the time, and they can likely tell a bank what that 57% will be so they can focus on them and cure them.

Also, Mr Houssei gives no evidence of his theory of why homeowner just walk away: not one interview, not one shred of evidence. So- these two points are the crux of Houssei's entire article: both are simple speculation- just like this market itself.

This article points more to the downfall of true investigative journalism than anything.

Report this Comment On July 03, 2009, at 12:51 PM, TMFHousel wrote: rsenor,

Thanks for the comments.

True, the report I sourced shows 90-day redefault rates of 44.5% after one year. If you'd like to take this 44.5% redefault rate as disproving my claim that 60% redefault rate is a failure, please do. I think most would agree that a 44.5% redefault rate is a total failure as well.

As for proving negative equity is a factor in foreclosures, here's a nice piece of analytical evidence form the Wall Street Journal that sums it up:

"The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures. A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures."

(here's the chart: http://online.wsj.com/article/SB124657539489189043.html#mod=...

As for providing an interview (though I didn't conduct it), here's what Jose Canseco (yep, the baseball player) has to say: "It didn't make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else."

Thanks again, and enjoy your July 4th weekend.

Morgan Houssei (who prefers when you use his real name, Morgan Housel)

Report this Comment On July 03, 2009, at 8:35 PM, burrowsx wrote: The problem here is that we are in a fundamentally irrational market. Instead of copycatting Bush-league tactics to support mega-banks, the Obama administration would have been better off unravelling the mortgage backed securities, and purchasing the underwater portion of selected mortgages. This would have taken toxic assets off the books of banks large and small, while giving the benefitting families incentives to stay with their homes instead of walking away. In addition, it would help put a floor on the housing market, which is still tanking.

Instead, the Obama administration compromises with itself even before it has to deal with Republicans. Using a TARP in a rainstorm gives ineffective protection to the people outside the TARP, as well as those under the TARP.

Report this Comment On July 03, 2009, at 10:07 PM, Bristinwolfsong wrote: As a responsible renter who saw this coming from a mile away I very much believe that the banks need to just take this straight in the shorts and start really marking down housing. I and many others like me are standing on the sidelines with cash waiting for the good deals. People speculated and lost they need to accept those losses and move on. The stock market is great because it enforces debts to be covered nearly immeadiately. If Joe whatshisname makes a bad call on a stock and gets cleaned out well the books are usually settled within days. but for folks who speculated on housing the govenment is purposely dragging this out as long as possible. There can be no growth until the deadbush is burned and cleared.

Report this Comment On July 03, 2009, at 10:09 PM, xetn wrote: I have never read so much crap. Reading through most of the posts on this subject, is to come to the conclusion that you all think the government should thus and so to protect you from YOUR mistake of purchasing a home that you could not afford. You were all guided by your greed in believing the big lie that home ownership was the greatest investment because it always goes up. And the government's programs of Freddie and Fannie made it easy for you to purchase more than you could afford. Now that you are in over your head, you want somebody (the taxpayer) to bail you out of your mistake. As if the government knows more than you do about everything, you rely on them to fix everything from banking, real estate, the stock markets and global warming. What a lot of BS, the government does not care one iota about you or your problems, it only cares about increasing its own power,

Face facts, you, and only you are responsible for your predicament. It is your responsibility to bail yourself out of it.

Report this Comment On July 04, 2009, at 7:51 AM, joandrose wrote: I wonder how much of the housing " situation " has not come about as a result of the rash of books such as " Rich man ,Poor man " which essentially advise their readers that the road to long term wealth and riches lies in gearing up whatever wealth you have by the purchasing of a portfolio of properties - and then depend on rental incomes to pay off the mortgages whilst you enjoy the long term capital growth ! I have no doubt that many homeowners have put themselves into that category purely because home ownership has been universally espoused as the easiest way to long term wealth for Mr Average !

Report this Comment On July 04, 2009, at 10:39 AM, dgmennie wrote: Interesting posts here, but all ignor the basic forces that (until now) have worked so well for driving the US economy: Get as many people into the game as possible, regardless of ingrained problems such as inflation, greed, high/unpredictable interest rates, unstable employment options, and unvarnished ignorance. Add to this a thick layer of sharp business practices (mostly legal due to the lobbying efforts of special interests) and the formula for disaster is complete.

How all this works can be readily seen from a cursory look at the US automotive business. The basic forces in play here are focused on keeping as many people as possible purchasing automobiles. This means making it (relatively) easy for even the mentally and physically unqualified to keep driving. Drunk? Accident-prone? Vehicle dangerous from lack of maintenance? Like to text-message and chat on your cell phone at 70 mph? NO WORRIES! You get to drive anyway, limited only by some eventual future encounter with serious injury or death. Instead of efficiently dealing with real problems, the whole (traffic) enforcement infrastructure is now (mostly) concerned with paperwork violations (big fines for a misplaced license or insurance card) and the politically-correct favorite: unlimited harrasment over tailpipe emissions.

Now, transfer this mindset to the much larger financial stakes involved with real estate and is it any wonder there are now huge economic problems to contend with? So long as the blame game continues (lets castigate the greedy brokers and bankers; no lets humiliate every homebuyer who bit off more than he/she could chew) the solution for reviving our depressed economy will not be at hand.

Report this Comment On July 04, 2009, at 6:43 PM, dibo528 wrote: Interesting and enlightening article. I totally agree. The government needs to push for many more mortgage modifications that lower the principal.

Report this Comment On July 04, 2009, at 7:57 PM, dibo528 wrote: People who are underwater may not care so much about the value of their home if they still have the same job they did when they purchased the house. But many people are either out of work or had to take a job that pays less. After a loan modification, they may have enough to make payments, but why do that if they will never have any equity, especially if their living expenses will be much lower by renting a small apartment?

Report this Comment On July 05, 2009, at 8:10 AM, thisislabor wrote: obama's refinancing plan, a plan to keep the housing market artificially inflated STILL?!

Did we not learn from the first bubble?! Damn just the blister pop and let the healing begin already people.

Report this Comment On July 05, 2009, at 8:40 AM, thisislabor wrote: What I don't get is why people keep thinking that housing markets are some kind of entity that needs to be "healed" or "fixed". It's as if they this thing is some kind of living creature or something, and apparently this living creature is sick? I don't get it, did it fall and break a hip or catch a cold or something?

Isn't a market a place where people buy and sell a good or service? Can people still buy freely? Can people still sell freely? How is it "broken" then?

Report this Comment On July 05, 2009, at 11:49 AM, tertertes wrote: Twist on the walk away story.

In 2006, I retired, cashed in my 403B for 45% down on a condo. Century 21 inflated the sq ft, Bank of America didn't verify, appraised it at 40% more than value, and I paid 25% more. It was filled with mold. In spite of almost doubling the price of the condo in repairs, mold will be back. The building is contaminated, plus the damp air from the dryers goes right up my wall. The new furnace, which was moved under the bedroom, has a high pitched hum and exhausts into the window. Fees include 'heat/hot water', not water, which is illegally billed per sq ft., not use. While away, I was billed $200.

Atty #1 - gee, so sorry , hope you're not mad at me, I don't do litigation.

Atty#2 - $2500, shuffled papers, wanted more money. I live on Social Security.

Bank of America - would not give me the documents needed, asked multiple times

Realty Board - we'll talk about ethics at our next meeting

Bar Assn - that's a fee dispute

Consumer protection - 2 letters, no response

Century 21 - no response

Broker - "I'll close up shop before I give you a dime"

TV Investigative Reporter - no response

Building Inspector - no mold noted. (Inexpensive meters can test for water.)

Lessons learned:

1. Hire 2 building inspectors and compare notes

2. Visit 3 different Realtors for opinions.

3. If you are allergic, hire an environmentalist to test for mold, not someone just 'trained'.

4. REALLY read the condo docs, underline questions, and have you attorney explain. Don't rely on the attorney, regardless of how much you pay him.

5. Verify square footage and tax valuation with the town assessor's office

6. Talk to the town's building inspector.

7. Don't waste your time talking to the neighbors.

8. I was taught that the experts are there to help you. Forget it. A very hard lesson.

Report this Comment On July 06, 2009, at 2:41 AM, Alanmulvey wrote: Check out http://obamamortgage2009.blogspot.com or obamamortgage2009.blogspot.com There needs to be a program for the elderly but not quite to retirement age for mortgage modification when the have lost their job during this particular recession. I made a decent wage because I put my time into a company and now have no job. I am looking at $10 - to $12 hr jobs after working all my life. You can't make a mortgage payment on that kind of money. I will eventually lose my home.

Report this Comment On July 06, 2009, at 6:53 AM, allenbarela wrote: Mr. President why are the banking,and loan company not making loans as you promised they would do for the american people we are all hurting and not getting any help. Time for them to answer to you for not helping us the little people that keep them in business, maybe we should boycott their business. Check http://obamamortgage2009.blogspot.com/2009/03/obamas-mortgag...

Report this Comment On July 07, 2009, at 1:06 PM, Melaschasm wrote: The various bailouts could have given every American $14,000 as a payment on their first mortgage. That would have actually done some good towards fixing this problem, even if it is a redistribution of wealth.

Neither TARP nor this mortgage refinance program was designed to actually help people, it is just a way for the government to expand its power further into the daily lives of the people