Modifying Mortgages -- Why So Few?

Greedy, Stubborn & Stupid? No, Just Greedy

I'm sure like a lot of people (and almost all *Realtors), I assumed that banks' unwillingness to modify underwater mortgages en masse was due to greed, stubbornness, or stupidity -- or a combination of all three.

And while I think that there's plenty of evidence to support that view, at least there's now a wisp of a counter-argument, made by The New Yorker's James Surowiecki ("Not Home Yet").

According to Surowiecki, banks don't modify mortgages because -- surprise -- it's not in their self-interest to:

Foreclosing is often more profitable for lenders than renegotiating is. There are two reasons for this. First, about thirty per cent of delinquent borrowers “self-cure” after missing a payment or two, they get back on track without any help from the bank. Second, between thirty and forty-five per cent of people who do have their mortgages modified end up defaulting eventually anyway.

Don't worry, there are still plenty of reasons to hate the banks (at least the too-big-to-fail ones).

*Like many Realtors, I'm personally aware of hundreds of short sales that languished for lack of bank approval, only to re-appear on the market at some later date -- significantly the worse for wear -- as foreclosures.

Beige Elephants

"The Bigger They Are, the Slower They Sell"

That's from an article in today's Wall Street Journal titled, "High-End Homes Frozen Out of Budding Housing Rebound" (8/3/09).

The thrust of the article -- which I agree with -- is that the lower rungs of the housing market are now stable if not recovering, while the upper bracket is still suffering.

That's because of an upper bracket "triple whammy": 1) less available, more expensive "jumbo" loans, which are typically used to finance expensive home purchases; 2) higher down payment requirements for said purchases; and 3) stock market and other investment losses, which impair the purchasing power of would-be upper bracket home buyers.

"Beige Elephants"

In fact, the very weakest segment of today's housing market is a particular subset of the upper bracket: upper bracket homes that need substantial updating.

Such homes face all the obstacles that other upper bracket homes do, plus one more big one: the cost to rehab and/or update, which often has to be paid out-of-pocket (vs. financed).

For a 4,500 FSF, five bedroom house, the related cost could easily be hundreds of thousands.

Unless that cost can be rolled into a difficult-to-get rehab loan, the prospective Buyer has to have that amount lying around.

Throw in the delay and inconvenience, the myriad design decisions, and the required oversight -- and suddenly, the pool of prospective Buyers for such homes isn't so big.

In today's market, such homes may not be white elephants . . . but they're beige.

The (slim) silver lining is, now is a great time to get bids on a major rehab project.

Pricing "Catch-22"

Vicious Cycle

You’re not seeing a lot of sales activity [in part ] because people are still trying to define price. You need a certain amount of volume to be able to tell people where pricing is.

--Mary Ann Tighe, CB Richard Ellis; The New York Times (7/31/09)

Upper bracket homes in the Twin Cities?

No, actually commercial real estate in Manhattan.

But the observation, from a top commercial broker there, describes some of the unique challenges now facing would-be upper bracket home Sellers (and Buyers) in the Twin Cities.

With few good comp's, the latitude for pricing widens. In turn, the wider the price range -- the more ground Buyers and Sellers have to bridge to do a deal.

The result is fewer and slower sales . . . which serves to further undercut "price certainty."

"Washington as a Ghost Town" -- Really

Closer to Constituents, Further From Lobbyists

What if Washington Were a Ghost Town?

--Headline, Peggy Noonan Op-Ed piece; The Wall Street Journal (8/1/09)

My thoughts exactly . . . almost 16 years ago.

In fact, that was the thrust of my own 1993(!) Op-Ed piece:

Here's an excerpt:

In an era of jet travel, teleconferencing, and faxes, why not bring Washington to the people? Specifically, let members of Congress work out of their home districts, under their constituents' watchful eye. Such an approach would have several benefits, and surprisingly few drawbacks.

First, it would make members of Congress less accessible to lobbyists and special interests. Lobbying Congress now is like shooting fish in a barrel: All you need is a Washington branch office staffed by a few employees, and a well-heeled political action committee ("PAC") . .

Conversely, locally-based members of Congress would be more accessible to constituents. The most successful businesses are the ones that "get closest" to their "customers." Politicians' "customers," the voters, are scattered across the United States, not based in Washington.

--Ross Kaplan, "Congress Come Home: Faxes Can Do the Talking on Capitol Hill"; Star Tribune (9/27/1993)

Little did I anticipate that in the intervening almost two(!) decades, advancing technology would make the aforementioned proposal even more feasible -- and Washington-Wall Street dysfunction make it even more necessary.

Nor did I anticipate that the presumed reason for bringing legislators together -- that proximity would promote comity, consensus, etc. -- would have even less sway.

So, is that what Peggy Noonan is championing?

Unfortunately, no.

The headline of her piece has to do with imagined advice that FDR and Richard Nixon would give President Obama dealing with today's myriad policy "challenges."