Thursday, March 5, 2009

Mortgage Principal Reduction is the Only Solution

The pressure is building on bankers right now. They are starting to realize the necessity of principal reductions, although they are still resisting. If you are a homeowner, your best alternative is to join a homeowner's union, and use the power of collective bargaining and striking. That's right, striking. As in, time for a mortgage strike. The fat cats need to do the right thing and write down the mortgage principal for honest hard working home owners, or it is time for a mortgage strike.

One in five borrowers in the $10.5 trillion U.S. mortgage market owes more than their property is worth, according to First American CoreLogic Inc., a real estate data company based in Santa Ana, California. Just one in 10 have received the principal reductions that research demonstrates is more effective at preventing defaults than the temporary payment reductions promoted by banks and the federal government. “You have to take the poison out of the water at the source,” says Ron D’Vari, 50, the former head of structured finance at New York-based investment adviser BlackRock Inc. and now chief executive officer of his own investment advisory firm, NewOak Capital LLC. “You have to go to the borrower, and you need to create liquidity at the borrower level.

One reason banks resist lowering borrowers’ principal is that doing so could threaten their solvency. In the worst slump since the Great Depression, the banks’ unrealized losses exceed their capital cushions by $400 billion, according to Nouriel Roubini, a professor of economics at New York University’s Leonard N. Stern School of business. When three of the biggest mortgage lenders, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. announced plans late last year to modify as many as 1.3 million mortgages, only Charlotte, North Carolina-based Bank of America explicitly pledged reductions of principal on some loans. Under an agreement with states investigating the lending practices of its Countrywide Financial Corp. unit, the bank said it would modify 400,000 Countrywide mortgages at a cost of $8.4 billion.

Home prices have dropped 30 percent since the market peak in June 2007, according to New York-based Radar Logic Inc., which tracks real estate sales in 25 markets. December 2009 contracts traded on the company’s RPX index signal a further 16.5 percent decline this year. “If your collateral is worth significantly less than the loan, it may be better to compromise and get half a loaf than hold out for the whole loaf and get nothing,” says David Dietze, president of Point View Financial Services Inc., an investment adviser based in Summit, New Jersey.

While the government and banks agree that loan restructurings are their best defense against an increase in the record 2.3 million foreclosures last year, so far they have focused on temporary rate reductions and deferred payment plans that rely on economic recovery and rebounding home values. President Barack Obama announced a $75 billion rescue plan Feb. 18 that promotes more affordable monthly payments for as many as 9 million borrowers through government-subsidized interest rates and extended loan terms up to 40 years. The administration today issued guidelines for the program. Obama also endorsed “cramdown” legislation that would authorize bankruptcy judges to renegotiate the terms of distressed borrowers’ mortgages closer to market values. Homeowners would have to exhaust all other options before using the bankruptcy court to reduce their loan payments, House Majority Leader Steny Hoyer said yesterday. Lenders also say that reducing homeowners’ mortgage balances precludes them from sharing in the properties’ eventual recovery and creates an incentive for all borrowers to seek concessions, even those who aren’t in danger of defaulting. “It suggests enormous and lasting damage to our mortgage markets and real estate values, which as a homeowner I don’t particularly want to see,” says Gary Townsend, 57, a former federal banking examiner who is now CEO of the investment firm Hill-Townsend Capital LLC in Chevy Chase, Maryland.

Bank resistance to more aggressive action was reflected in a December study by the Comptroller of the Currency, a federal banking regulator. After six months, more than 55 percent of the loans modified last year re-defaulted, that report showed. By comparison, 28 percent of homeowners whose modifications trimmed their principal by a fifth or more were late after six months, according to research by Diane Pendley, a managing director of Fitch Ratings in New York.

The Obama administration’s failure to close the negative- equity gap means that its plan “will likely join the dud parade of federal rescues,” says John Kiff, an International Monetary Fund economist in Washington. While buying time for the financial system to stabilize and the economy to recover, the government program steers clear of restoring homeowners’ lost equity, a more effective method of stemming foreclosures, according to research by Credit Suisse Group AG, Goldman Sachs Group Inc. Less than 1 percent of the 88,830 modifications tracked by the California Department of Corporations from January through September last year included reductions of principal. By comparison, 47 percent of the restructurings lowered borrowers’ interest rates, according to the state agency. One in 10 revisions from a national sample in November included decreases in principal, wrote Alan M. White, an assistant law professor at Valparaiso University in Valparaiso, Indiana, in the paper, “Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications.”

DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates “gridlock,” delaying bad-debt workouts and an eventual recovery. “We felt there was going to be an opportunity going forward, not anticipating that it would be as bad and ugly as it is,” says DellaCamera. He says he has bought about $125 million in distressed mortgages, a 10th of his target, through affiliate National Asset Direct Inc., based in San Diego.

Dietze, 53, of Point View Financial, says he still expects banks to bounce back and says that discipline in the credit markets is important to both borrower and lender. “I think there’s no traditional banking business in the world that’s better than lending a good borrower money that they must pay back under pain of losing their roof overhead. “Right now, everyone is concerned about the value of mortgages and depreciating residential real estate that secures it,” Dietze says. “But from an investor’s standpoint, you know that business is going to come back.”

“The banks need to flush out all the bad assets", says Louis Amaya, 44, NAD’s chief investment officer. “Let guys like us buy them, service them, reliquefy them into good loans.” The process will “put a lot of them out of business,” Amaya says. “There’s going to be some hard, short-term pain that needs to happen in order for us to start rebounding.”

1 comment:

Anonymous said...

Apparently you can get a principal reduction quite quickly, take a look