A Level Gaze

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Saturday, December 08, 2007
Sucker Trap

I had thought the Paulson Plan rather a poor deal for homeowners:

The basic outline is that loans are put into three segments:

1. Borrower appears (from fairly superficial analysis of the data, not any deep digging) to be eligible for a refinance. These borrowers are to be encouraged to refinance.
2. Borrower appears able to make payment at current rate, but appears (again, from fairly superficial analysis) to be unlikely to be able to refinance (generally because LTV is too high with FICO too low). These borrowers are eligible for the “fast-tracked” mod (the rate freeze) if they meet some FICO and payment increase tests.
3. Borrower appears unable to make payment even at current rate; these borrowers are presumed to be unable to refinance. They are not eligible for the “fast track” rate freeze mod; they may be eligible for some kind of work out, but it would have to be handled the old-fashioned fully-analyzed case-by-case way.

Which the inimitable Tanta further boils down to:

1. Not in default and default not imminent
2. Not in default and default reasonably foreseeable
3. In default or default imminent

As I mentioned in the previous post, the plan was specifically targeted to freeze the rates of only those homeowners who were at the very limit of their financial wherewithal, to squeeze the absolute last nickel out of them. As Tanta explained, there is a good reason for this: the securitization contracts specify that the terms of only those loans in imminent danger of default may be modified without (complex, expensive) renegotiation.

In an environment of decreasing prices, spiking inventory, and tighter credit, a provision that makes it barely possible for homeowners who bought at the top of the market to stay current on their mortgages is at best dubiously advantageous. Against the ability to stay in their homes would have to be weighed the fact that they would be overpaying for the privilege with the last of their financial resources. Unless their incomes increase significantly during the five years the Plan covers, they would be in much the same position in which they find themselves today: facing a significant payment increase they can't to afford. In the then-likely event of foreclosure, they would be left with nothing. If, instead, they just mailed the keys to their servicers now and walked away, they could then rent essentially the same houses for much less money, save the difference, and be in a position to make downpayments on rationally-priced homes when their credit ratings reset.

This looked like a bad enough deal considering what many thought to be the Plan's other major stipulation: that the loan-to-value ratio (LTV) of the first mortgage could be no less than 97%. As such, mortgagees facing hopeless levels of debt on their homes would be excluded from participation, and wouldn't be thereby tempted to prolong their impossible situations. However, as Mike Shedlock pointed out yesterday afternoon, that provision had been widely misread: the Plan covers only those with LTVs of more than 97%. That is, only those in the worst shape, many of them already owing more than the value of their homes, would "benefit".

In light of this clarifcation, the Plan can no longer be construed as possibly a good deal for certain people in very specific circumstances. It is, in Mish's very apt characterization, nothing more than a "sucker trap" that will ultimately ruin nearly every homeowner who participates in it.

Friday, December 07, 2007
Felix Salmon Thinks I'm a Bad Person

Salmon Sez:

"If you're hoping to get a home [on] the cheap out of foreclosure, then maybe you're damaged."

My response:

Excuse me?

Real estate is overvalued. Those who, like me, did not buy for that reason will naturally wait for prices to come down before considering buying. Foreclosure is one means by which the the expected price reductions will be effected. That's how the market works. There is nothing normative about it.

I'm not going to buy a house until I find one that I like at a reasonable price. If that house is available as a result of foreclosure, so be it. *I* didn't cause the previous owners to buy more house than they could afford, nor did I scam them into signing an impossible mortgage. I strongly resent your characterization of those who hope to benefit from the coming rationalization of the real estate market as "damaged."

Just because I saw this train wreck coming and anticipate the availability on the market of decent housing I can actually afford doesn't make me some kind of ghoul. I might feel good that I haven't overextended myself, but that's my right. And it doesn't make me "damaged."

On the subject of what a good deal this plan is for everyone, I'd like to point out that the plan will give "relief" only to those who are already stretched to the limit. To the extent the plan is carried out, there will be that many more people stuck paying top dollar for a depreciating asset. Unless their incomes rise substantially, they won't be able to afford much else, and when the interest resets in five years, they'll be in the same boat they're in now: facing foreclosure.

Yeah, this is a great deal.

Update: Exclusive to ALG! Felix says he didn't mean it. See comments and judge for yourself.

Thursday, December 06, 2007
"Freedom requires slavery just as slavery requires freedom. Freedom opens the windows of the soul so that man can discover his most profound beliefs and commune with Master. Freedom and slavery endure together, or perish alone."

- Mitt Romney

Also, read this.