The Fake Loan Modification

Fannie Mae, Freddie Mac and the big banks have instituted an aggressive new loan modification program that has nothing to do with loan modifications. The new scam is designed to keep payments flowing to banks at the expense of mortgagors being sunk with negative amortizations and teaser rates. Hear ye:

The great new and improved big plan to save the housing sector involves giving 40-year terms, adding balances to the end of the loan and offering teaser rates. IT WAS THESE EXACT PRACTICES THAT GOT US HERE IN THE FIRST PLACE! They were called ‘interest only’ and ‘Pay Option ARMs’.

This ‘new’ program is nothing new at all. It is simply an aggregation of a bunch of stuff brought forth previously that just makes everyone renters. The government’s new plan of reducing rates, extending terms and allowing negative amortization is being done primarily to keep borrowers from walking and renting by competing with rentals.

This plan does not solve the problem – that home owners are hopelessly underwater and over-leveraged to their home. They can’t sell or refi. In turn, they are making a wise financial decision and walking away. Negative equity cuts across all loan types and borrower demographics.

Sooner or later, house prices will to collapse. All the king’s horses and all the king’s men cannot stop it. In fact, all the world’s kings couldn’t stop it either. These new programs are swimming upstream in a river of subprime sludge. Witness:

The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure. I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.

Its sad when the only way to ’save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!

What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.

To date, four banks have joined the new program. Most recently, Citigroup penned its signature to the list:

Citi becomes the fourth major bank to garner press for a pronouncement of mass modifications, and an associated freeze in foreclosures. The FDIC kicked off the loan modification party in August by announcing a plan to refinance troubled homeowners into “affordable” mortgages at IndyMac Federal Bank; Bank of America Corp. (BAC: 17.10 +0.59%), saddled with legal pressure tied to its Countrywide unit, later announced its own $8.4 billion loan modification program/settlement in early October, which is also expected to target 400,000 borrowers. Just last week, JP Morgan Chase & Co. (JPM: 37.19 +7.58%) launched an aggressive loan modification plan estimated to impact roughly $70 billion in mortgages

Similar programs motivated by legislation have shown tepid success slowing down foreclosure rates in California, but they cannot solve the foreclosure crisis.

Foreclosure sales in California dropped a sharp 39.1 percent between September and October, according to a report released by ForeclosureRadar late Wednesday. The drop, however, has largely been ascribed to recent legislation in the state that is effectively stalling most foreclosures amid new borrower notice requirements.

“It would be a mistake to conclude declines in foreclosure activity indicate an end to the foreclosure crisis,” said ForeclosureRadar CEO Sean O’Toole, echoing comments made by many industry observers in recent weeks amid falling foreclosure statistics within the state. But O’Toole also suggested that lenders themselves may be slowing the foreclosure roll within the state, as they look to modify more loans.

And if you believe the lenders are truly concerned about stemming the foreclosure crisis, then you’re just along for the ride they want to take you on.

“While lenders now appear to be embracing the concept of foreclosure moratoriums and loan modifications, neither typically address the core issue of negative equity,” O’Toole said. “Most loan modifications focus on lowering payments to affordable levels by using unsustainably low interest rates, not unlike the ‘teaser rates’ that many have blamed for the current crisis.”

In the end, it comes full circle. Greed led to teaser rates and option ARMs, which led to a credit crisis, to desperation, back to teaser rates and to option ARMs.


1 Comment »

  1. hope002 said

    That is a grim outlook you have there for the future of the housing market though I suppose given the past two years of complete and utter turmoil maybe that assumption is not to far off.

    What do you think about the new Obama Plan known as Make Home Affordable? For those not familliar with the details you can find more information here @

    I hope things start looking up. I enjoyed hearing your perspective on the Mortgage crisis and have gained some perspective. If you ever get a chance check out my blog at

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