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Wednesday, November 21, 2007


scope of the housing disaster finally begins to dawn on government officials

through wsj via calculated risk:

In an interview, [Treasury Secretary] Mr. Paulson said the number of potential home-loan defaults "will be significantly bigger" in 2008 than in 2007. He said he is "aggressively encouraging" the mortgage-service industry -- which collects loan payments from borrowers -- to develop criteria that would enable large groups of borrowers who might default on their payments to qualify for loans with better terms.

"We're never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off," Mr. Paulson said. "I've talked to enough people now to know there's no way that's going to work."

the california state government is taking the lead:

Gov. Arnold Schwarzenegger announced a deal Tuesday with four mortgage lenders to freeze adjustable interest rates for some of the state's highest-risk borrowers.

but it must be said that this amounts to price controls -- and when in the history of mankind have price controls worked to solve any economic problem? the likely result, as pointed out by mish, is to aggravate the problem -- people will be trapped in homes with mortgage notes that are vastly larger than the liquidation value of the house, as prices continue to decline and the payments that are being made on the note cannot significantly mitigate the principal (in fact in many cases actually grow the principal). on the whole, the vast majority of people now in the situation that california is trying to address are catagorically better off walking away from their houses today.

from the lender side, the invaluable tanta contextualizes why paulson and schwartzenegger are getting any traction with these proposals -- the expectation of a tacit government bailout to make this arrangement profitable, or at least more profitable than the extant alternatives.

[W]hy have mortgage lenders worked out troubled loans ever since the dawn of mortgage lending? Because lenders do what lenders do: seek maximum profits. If a loan was supposed to earn you a dollar, but isn't earning you anything because the borrower is not paying, and you have the choice of restructuring, and getting, say, 90 cents, or foreclosing, and getting, say, 70 cents, you restructure.

... That requires people with skills. Enough people with skills to look at a lot of delinquent or about-to-be deliquent loans fast enough to not miss your window of opportunity on that 90 cents. ...

The industry is telling you right now that they just don't have enough people with the right skills to be able to wade through all the problem (or potential problem) loans fast enough to make the workout/foreclose decision. ...

This means that the industry cannot do what it needs to do to defend itself. It will continue to take 70 cents instead of 90 cents, because it does not have the resources to commit to this problem, or because if it did commit those resources, the extra cost of staffing up and training and recruiting and so on would make the 90 cents scenario no longer achievable. Eventually the recoveries either converge--it's just as expensive to work out as it is to foreclose--or they don't, but only because the RE market is diving faster than salaries for workout specialists are improving, so that you end up with the choice of 70 cents or 50 cents, then the choice of 50 cents or 30 cents, down to wherever this has to go to sort itself out. Equilibrium in the housing market or servicer bankruptcy, whichever comes first.

Concrete bennies have to be put on the table. Regulatory relief. Fun with reserve and capital calculations. Approval of mergers and acquisitions. You know the drill. This is about maximizing profit. You are going to have to do something that makes this profitable, if you're going to expect lenders to do it on a large scale. Your job, of course, will be to write the PR that says that all this "regulatory relief" to for-profit banks and mortgage companies is all about Helping the Poor and being Heroes to Homeowners. I suspect you're up to that task. There is no shortage of PR-writers in this administration.

... [I]t does seem like you might want to be kind of cautious about how many goodies you put on the regulatory table in order to get the lenders to play ball. I for one am not sure you can afford to cover all the checks your mouth is writing any more than the lenders can. It sounds to me like you probably need to hire a bunch of regulatory relief workout specialists who can put some dollars and cents on your options here.

this paper further outlines the certain costs and uncertain benefits of loan modifications.

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