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Negative Equity Not A Factor In Re-Defaults
Recent approaches by the Obama administration for mortgage mods in Prime and Alt-A have sought to appease negative equity perceptions (and reality) of borrowers, with the end result being a substantial push for loan mods, as HOPE targets a 3-4 million loan mod total over the duration of the program (which is substantially behind schedule as only 230,000 mods so far have been enacted). Yet empirical data indicate that negative equity is an irrelevant issue in examining the behavior of re-defaulters.
Some findings by Credit Sights (presented via Research Recap) indicate that negative equity, whether tangible or not, has moderate if any impact on redefault rates, with subprime re-delinquency hitting 40% while prime and Alt-A at approximately 30%.
Thus it is only a matter of time before a new mortgage mod program appears, one which instead focuses on interest and principal payment forbearance. Of course, the benefit of this would be to postpone eventual re-re-redefaults far into the future, presenting a case for the green shooters to claim that things have again stabilized as delinquency numbers "improve" sharply, while negative would be a delay in the disclosure of how bad any given underlying mortgage security portfolio is.
In terms of security impact, Credit Sights has this to say:
Such a delayed repayment schedule will likely see junior RMBS benefit at the expense of senior notes. Subordinated bonds may continue to receive coupon payments thanks to more mortgage borrowers being able to make their payments. At the same time, senior noteholders will need to wait longer to receive their principal back and are still at risk of losses if the borrowers default.
However, the perverse incentive on defaults to increase if repayment terms are adjusted also becomes a concern.
…while negative equity may not be sufficient to encourage large numbers of comfortably-off borrowers to default, the prospect of being able to negotiate much better terms might.
As always, the administration is aggressively juggling with critical variables and is only focused on extracting as much NPV as possible out of any situation, with little to no regard for what happens to the economy several years down the line as the cost side of the equation become the dominant one. Then again, Bernanke will by then have inflated debt to manageable terms, unfortunately side by side with the dollar having reached hyperinflationary status. That, or the deflationists are right, and the tens of trillions of consumer net worth will never be replaced to stimulate an inflationary environment, no matter how many Fiatscos, in the parlance of our times, are printed each and every day.
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the deflationists are right,
net worth will never be replaced (yes for some folks and debt will be destroyed),
(but the Federales won't stop til they've pumped enough)
Bernanke will by then have inflated debt to manageable terms
(paging Dr. Faber.)
VIX up, markets up, Bonds up, Dollar Up....supposedly, nobody wins or loses?
Here is a great interactive spreadsheet that explores the possible outcomes for a borrower refinancing at 125% LTV:
http://seattlebubble.com/blog/downloads/125-pct-Mortgage.xls
The striking conclusion is that even if housing prices go no lower and then recover at a reasonable clip of 2-3% a year, the 125% loan will still be underwater for 6-7 years. I am grateful for Mr. Durden putting up this post that provides some datapoints on the question of re-defaults and netative equity. But looking forward I just cannot imagine someone dutifully making payments for 7 years on a mortgage with negative equity.
"…while negative equity may not be sufficient to encourage large numbers of comfortably-off borrowers to default, the prospect of being able to negotiate much better terms might."
That point is cerainly not lost on me :-) The above link is really just about the 125% LTV program where I believe Credit Sights is talking about the possible peramaters of a govt program not yet in place.
People w/o income cannot pay a mortgage. People that are earning 30% or 40% less than in the last 5 years are not interested in servicing gigantic loans for a piece of plywood and drywall on the equivalent of a datscha lot with sprinker system.
Owning a house is not what it used to be when you're a slave to the banks and utility companies. RVs are cheap and you don't have to worry about the neighborhood going to the dogs.
"RVs are cheap and you don't have to worry about the neighborhood going to the dogs."
Don't be so sure. I haven't seen you drive into my neighborhood with your RV yet.
CW
Point is that an RV can be moved anywhere.
If the neighborhood is crap, drive off and away. On a lighter note.. there is a great new dynamic at campground across the greatest nation on Earth. I can imagine that real opposition and TEOTWAWKI preparations are discussed and implemented by people who live on little but debt free.
As a slave to the banks and utility corps. it's kinda hard to get ahead. American dream is reborn on campgrounds. I can see that.
I really liked your comment. It is correct. What happened to this United States of America where we used to have good jobs, wages, and home ownership was for all people with a 15-year mortgage ? I'm an older person and I am upset. My children do not understand why they aren't doing well, why they cannot find jobs in DAYTON, OHIO. My Mom doesn't understand why she can't earn any interest on her little savings account in the bank they way she did in years past & why does the bank charge her fees instead of paying her interest on her savings. I just feel like crying. No matter how hard I try, life doesn't seem to be working anymore the way "it used to be" . Please, someone respond to a novice who is trying to understand economics. Did it start with NAFTA & the outsourcing of good jobs to cheaper wage countries so that WALL ST. could make more profits ? Sincerely.................
It is because most of your country lived beyond their means for 2 generations and now it is time to pay all that money back. I think the root cause is a lack of education though.
The real lack of education is apparently very severe amongst Chicago and MIT Economics PHD's. Greenspan and Bernanke thinking that a housing bubble was not possible and that a credit bubble was not possible must have been due to a lack of education. So if the entire American adult population got PHD's in economics, the outcome might have been the same.
These crooks are in crisis. The mortgage crisis is not only an economic issue for them, it is a political issue..
Obama brought Chicago-mob politics to Washington, and with him the mob’s use of ACORN and the Community Reinvestment Act (CRA) for a grassroots activist movement to force banks into bad loans —planting the seeds of today’s fianancial mortgage meltdown. Barack Obama for years has worked with ACORN (the Association of Community Organizations for Reform Now), abusing the law by forcing banks to make hundreds of millions of dollars in ‘subprime’ loans to often uncreditworthy customers using intimidation tactics, public charges of racism and threats to use CRA to block business expansion. And now he’s going to force taxpayers to pay off the bad loans.
According to Investors Business Daily: "Obama, who once represented ACORN in a lawsuit against the state of Illinois, was hired by the group to train its community organizers and staff in methods and tactics of the late Saul Alinsky. ACORN would stage in-your-face protests in bank lobbies, drive-through lanes and even at bank managers’ homes to get them to issue risky loans in the inner city or face charges of racism."
The Chicago Tribune described the group’s agenda as "affirmative action lending."
Obama also helped ACORN get funding. When he served on the board of the Woods Fund for Chicago with Weather Underground Activist William Ayers, the Woods Fund frequently gave ACORN grants to fund its activist agenda.
A former White House staffer writes in the American Thinker that after ACORN took over the House Banking Committee in 1991 for two days to protest efforts to scale back CRA, Obama represented ACORN in the Buycks-Roberson v. Citibank Fed. Sav. Bank 1994 suit against red-lining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision that greatly expanded the CRA and laid the groundwork for the Fannie Mae, Freddie Mac home financial crisis. Barack Obama was the attorney repesenting ACORN in this effort.
With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans even more aggressively.
you forgot sekret muslin. And Poland
http://www.dailyfinance.com/2009/08/24/investors-at-risk-as-wall-street-repackages-debt/
....."Fool me once, shame on you, fool me twice, shame on me".....
"Such a delayed repayment schedule will likely see junior RMBS benefit at the expense of senior notes. Subordinated bonds may continue to receive coupon payments thanks to more mortgage borrowers being able to make their payments. At the same time, senior noteholders will need to wait longer to receive their principal back and are still at risk of losses if the borrowers default."
Interesting; a kind of backchannel means to shove the senior secured lenders' rights aside, a la Chrysler / GM. Don't we have enough capital flight already?
Pardon my French, but who gives a shit what the empirical evidence suggests... common sense would tell you that default rates HAVE to go up with -ve equity
Empirical evidence suggested that sub-prime borrowers were on the whole honest people who's house prices always went up.
I don't think the fact that the ratings agencies should no longer exist for all this shit gets enough play.
That is not true according the the Federal Reserve:
http://www.scribd.com/doc/18518277/Below-the-Line-Estimate
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