Monday, January 24, 2011

The Greatest Depression? Ask Rep. Neugebauer (R-TX)

Rep Randy Neugebauer, Chairman, House Financial Services Oversight Subcommittee, said it is time for the government to admit its foreclosure prevention efforts are a failure and should be shut down. The Texas Republican said such programs are counterproductive and are preventing the housing market from bottoming out, which is necessary before recovery can begin. (1/24/2011 from the American Banker)

Now, there is a real solution to the foreclosure crisis! Bite the bullet - displace hundreds of thousands of homeowners, let the inventory of bank-owned properties (OREO) sky-rocket, let the housing market drop bottomless and that will allow us to have an economic recovery. The sad part about Rep. Neugebauer's assertion is that he may be right in the long-term, but at what IMMEDIATE & CURRENT COST!

The program is not working - no news there. Why? Because the government regulators and policy makers do not want to to tackle the "investment banks" and the "investors" in mortgage-backed securities ("MBS")to tell them they WILL modify loans. At this time, no one can order a lender, mortgage servicer, investor, Pool Trustee, or any one else that it/she/he MUST modify a loan.

Everything is voluntary and the decision makers are in a position that they cannot lose. even if the market "bottoms out" as the Rep. from TX suggests it should. The Sponsors of the MBSs and the investment banks that put the packages together and sold them have already been paid or are so high up the MBS hierarchy of payees, that unless the value of every mortgage in the pool of mortgages becomes utterly worthless (no value at all to the houses securing the mortgages which comprise the MBS), THEY WILL GET PAID.

From an "economic" point of view (see the 1/13/11 posting), the Rep. makes sense. From a financial point of view it does not. From a human point of view it would be "The Nightmare from Wall Street". Remember "economics" is the study of an economy which is merely a system to deal with supply and demand. The concepts are simple but the implications are not. This is a case where the theory is great and accurate in its long-term view. But, getting from here (where/when we need modifications and for the Government to help all of us struggle through the mess) to there (where the market, the economy can correct itself) is a 20 year span.

Perhaps the Rep. has not taken into account the mass disruption of the pensions which hold funds that hold mortgage-backed securities. Or maybe he has forgotten that if there is no confidence in the value of the MBS, which is really set by its stability and ability to pay the return it's promised, the value will drop to $0 or something close to it. In reality, the houses that would be lost in foreclosure will retain significant value, even if that is only 20% or 30% of the mortgage balance. When the next generation comes along, it will be able to buy a vacant house for 40 cents on the dollar from what was owed on the mortgage. What will it cost the current homeowners on a nationwide basis?

Factor in those who lose houses to foreclosure and then the rest of the homeowners, from low-income to upper-middle class income, who manage to keep a house now worth half (1/2) of what's owed, and you have a "financial" (not economic") crisis. The economy will have way to much supply, and literally no demand for years.

Recession? Nah, the Greatest Depression

Author's Copyright by Richard I. Isacoff, Esq, January, 2011

rii@isacofflaw.com

1 comment:

Jazzie Casas said...

Last year was kinda a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.