In case you haven’t heard, the big pickle of the bunch, Citigroup, has decided to cooperate with allowing bankruptcy judges to modify the terms of mortgages.  This is a very important issue and certainly a worthwhile subject to debate.  Let’s not forget that Congress is involved once again with Schumer at the plate jockeying for face time.  We don’t want Barney Frankfurter to get all the attention now do we?  Let’s just call it healthy competition.

 

To begin Citigroup is always a good patsy to start some new initiative.  As long as they don’t bring back Chuck Prince, the idiot attorney that ran the company into the ground, I am fine with whatever the government wants to use Citi for.  Citi is the poster child or should we say the first sucker on the block.  Sorry, I am a long time Citi stockholder so I always need to take a crack at it.  It is an “it”, trust me.

 

The point of the pending legislation is to bully the banks and lenders into modifying loans so we can curtail the foreclosure epidemic.  If you have been reading my blog you know that 90% of loan modifications have failed and the re-default rate to consumers is skyrocketing.  The government is phishing literally for a hammer to intimidate the lenders toward a level playing field with the consumers.

 

The question is will it work or will it cause significantly more damage to our free markets.  If you ask the industry players they hate it.  If you ask any scholar they will tell you it is protectionist to a degree and it will scare away capital the may normally invest in the mortgage market.  After all, who is going to lend money knowing that a deadbeat borrower has little recourse/accountability if they choose to go into bankruptcy.  Let’s face it, it is simply unfair and it will inhibit our markets if it is too broad in scope and duration.

 

From the front line of the housing crisis I would like to put a positive spin on this new threat to the lending establishment.  When capitalism goes arye and government needs to step in, and like today, sometimes you need some intimidation.  This is exactly what is going on.  Forget about fair for a moment.  The lenders have billions in capital from the Tarp Program, however, it appears they really don’t want to lend or deal with the housing crisis other than foreclosure.  I think the headline is much more scary than what will happen in actuality.

 

Let’s look at history with governments screwing with the mortgage market.  If you go back a few years you will see that the State of Georgia and Washington D.C. passed very strict laws that affected secondary market mortgage investors.  The secondary market is where the pool of liquidity for new mortgages lies.  The laws that were passed had very strict covenants that allowed the liability for misconduct from originating lenders to pass all the way to the secondary market investors on Wall Street.  Uh O!  Don’t mess with Wall Street. What happened?  Wall Street players and all the big boys in the lending community decided to no longer purchase loans originated in the select areas affected by the new laws.  You know what happened next.  When the mortgage money dried up the idiots that were overzealous in passing the laws had to amend them.  It was a very nice self correcting process.  After a period of time everything found a way to fix itself.

 

This relates to the new legislation because we can not scare the private mortgage money away.  A big headline is just enough to get the lenders thinking about workouts to avoid foreclosure and keep some more people in their homes.  Ideally anything that slows the pace of foreclosures or draws it out for an extended period of time is much better than the current epidemic.  I believe that the lenders will want to work more loans out, not for the fear of bankruptcy, but for what may happen if they don’t given Congress gave them all that Tarp money.

 

Here is where I see the real free market positive.  The bankruptcy laws were changed in 2005.  These changes provide somewhat of a backstop to the current threatening legislation.  People are not going to be able to walk away from their debt as easily as they could have in the past.  In addition, anybody in their right mind should not want to go to bankruptcy unless of course you have your credit card and you get suckered by an attorney.  The personal cost of this action is simply too high given the alternatives.  Many intelligent people will avoid bankruptcy and settle for a little more leniency with a workout from their lender.  This will be good for the people and it will be just enough to push the lenders to do more workouts.

 

Don’t be naive and assume that the lenders are going to begin offering write downs of principle and affordable long term solutions.  This my friend is not going to happen.  Congress wants to push the lenders to cut back on the foreclosures.  The lenders aren’t going to forgive the money you owe them.  A loan modification is based on affordability.  They got you on the hook and they intend to keep you there.  The loan modifications will satisfy many people until they don’t anymore.  What do I mean by this harsh statement?

 

The person living in a $500K house paying the equivalent of a $400K mortgage after a healthy loan modification by their lender will still gaze outside across the street at the same house that is worth $250K.  When you are an American and you have no skin in the game it is hard no to focus on this.  You lender has modified your loan to a reasonable level of affordability but nowhere near where you could be if you parachuted out of your situation.  The heat is off your family because the hour glass is no longer counting down to foreclosure.  You still won’t be happy with the payment and you most certainly won’t like the debt around you neck.  Where am I going with this?

 

Real Estate Short Sales baby….Yeeeehaaaa.  Now we are talking free market solution with bells and whistles.  Forgiven mortgage debt.level playing field…Conan’s Creed…”Crush they enemy, have them driven before you, and hear the lamentations of their loan administrators”.  It’s all good! Beating the system and moving into that house across the street for $250k with no strings attached.  Can it be done?  It’s being done everyday.  Most people are in denial and caught up in a general state of confusion and let’s not forget strong moral character.  As mentioned in an earlier blog, my best clients are the ones that have been intimidated an figuratively beaten by their lenders.  Now they are indifferent and ready to find a real long term solution.

 

Big headlines for Loan modifications with governmental intimidation to keep people in their homes and cut back on foreclosures sounds like a plan to me.  I think I like this new legislation.  It’s a good short term push for the current deadlock between lenders and borrowers.  However, the more people that modify their loan terms with their lenders, where the solution falls short of a long term one, the more you will see people enthusiastically search for a better way.  It’s a painful process.  Call you lender and beg.  When you are tied of begging and concerned for your financial future come visit us at www.thenegotiatedsolution.com and investigate if a Real Estate Short Sale Solution has merit.  Until then, I say we legislate.  Let me know what you think!

 

GHunter

Submitted on Thursday, January 8th, 2009 at 8:45 pm