Tuesday, October 13, 2009

Legal Happenings in the Mortgage World...

With the housing market still pretty moribund, both the federal and state governments are trying out new regulatory equivalents of an AED to get a pulse back for the industry.  A few recently announced include this one in California that the LA Times recently blogged about:

In a flurry of end-of-session bill signings, Gov. Arnold Schwarzenegger approved new laws that, among other things, tighten restrictions on mortgage brokers so they can't "steer" borrowers to riskier, higher-interest loans when the borrowers could afford and qualify for more economical ones. That law, AB 260 by Assemblyman Ted Lieu (D-Torrance) also bans negative-amortization loans in which the principal keeps rising even though monthly payments are made. The measure caps prepayment penalties to 2% of the principal balance and allows state regulators to enforce federal lending laws.

By and large, these are pretty good ideas in that they primarily focus on reducing future unsustainable mortgages. In other words, they have somewhat proactive bent (a good thing since California has become the Atlantis of housing markets).

On the other hand, the federal government seems determined to keep announcing new loan modification programs--apparently hoping that something might eventually pan out. The Housing Wire has this story on the latest one:

HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.

A graceful exit?

What do we have here...regulated empathy?

Something about this program just smacks of a well-intentioned but misplaced regulatory focus. Maybe (hopefully!) there will be more substance to this program as details are released.

In any event, with the rate of re-defaults on modified loans continuing to be high, one might wonder if simply re-jiggering loans in the short term (such as capitalizing late payments or extending the loan's length) when those same loans remain fundamentally unaffordable to the borrower in the long term really isn't just forcing good money down the rabbit hole after bad.

The key seems to be that we have to recalibrate the homeownership/rental equation to get it better in line with historical norms. That is, a buyer saves enough money (10% to 20%) for a downpayment that builds some of your equity into the investment. Until you can do that, you rent while saving up the downpayment (or, at the very least, you buy a much less expensive house for the first home purchase).

Chad Emerson

UPDATE: I just noticed that Mish Shedlock has also posted some interesting thoughts on this topic in his always useful blog:

Here's the deal. These modifications schemes are attempting to make the payments affordable whereas the real problem is the huge positive incentive for those underwater on their homes to simply walk away. Restructuring payments cannot possibly fix a problem of debt levels being too high. Nor can restructuring payments help anyone out of a job, unable to afford any payment. Those on the upper end of the economic scale are more apt to understand the situation than those on the lower end of the economic scale. High end foreclosures can be expected to increase for this reason, even for those with a good paying job. At the low end of the economic scale, only those with a job can benefit. Yet, even then the odds are most program participants would be better off walking away than becoming debt slaves to an overvalued residence. Some will eventually figure this out. Others will find that even a lower rate is not enough to keep them in their house. Still other will lose their job in the next 1-2 years and be forced out of their homes.

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