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November 11, 2008

Citigroup Puts the Kibosh on Foreclosures

Some 500,000 homeowners with mortgages from Citigroup have a little more emotional insurance today. The fourth largest bank plans to modify $20 billion in mortgages to keep people from having to flee their homes; already they've helped prevent about 370,000 people from being foreclosed upon, reports Bloomberg; that's $35 billion in mortgages. The news comes amid reports that October foreclosures dropped dramatically, and for the second month in a row, to February's numbers, perhaps thanks to government and corporate shifts in policy and attitude. "Congress has been urging financial-services companies to work with borrowers after foreclosures rose to the highest on record in the third quarter," they write. "JPMorgan Chase & Co. said Oct. 31 it will stop foreclosure on some loans as it works to make payments easier on $110 billion of problem mortgages, while Bank of America Corp. said it has modified 226,000 loans this year, including those from Countrywide Financial Corp."
Citi Will Halt Some Foreclosures, Rework Mortgages [Bloomberg]
Citigroup Puts Moratorium on Foreclosures [AP]
Photo by JS300.

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About time that the banks realized that renegotiating with someone to keep them in their home makes more business sense than evicting them and selling the property at a loss.

Obviously, if you can sell the property for a profit or the homeowner is really a deadbeat, then foreclose all you want, but if the original homeowner actually can afford a restructured mortgage for close to current market value, renegotiating is better for everyone.

Posted by: northsloperenter at November 11, 2008 9:39 AM

WOW

Posted by: Whoops Johnny at November 11, 2008 9:44 AM

None of this will stop the national housing market from continuing it's crash.

It's highly likely that when prices erode substantially further, combined with more and more folks losing their jobs in the worsening economy, that these folk's home foreclosures are only being postponed.

My experience as a landlord is that in most cases people who don't pay their rent on time rarely change their behavior even after being given multiple chances. I suspect the same will be proven true with many of these unfortunate sub-prime mortgage holders.

You can't teach an old dog new tricks.

Posted by: IronBalls at November 11, 2008 9:53 AM

This will make mortgages more expensive in the long run.

Posted by: lechacal at November 11, 2008 9:54 AM

While I agree that it is a good thing, northsloper, the reticence of banks to restructure a loan is driven by business issues, not a philosophical issue with restructuring a loan. Two major factors they look at are 1. whether the borrower would really be able to pay the restructured loan, and 2. whether there are restrictions on the ability of the loan to be restructured/altered/refinanced because of restrictions place on that loan if it was part of a pool of loans that was collateralized to create mortgage backed securities.

Posted by: 1842 at November 11, 2008 9:56 AM

The national news increasingly dominates our local real estate picture. How long can nyc real estate resist the tremendous downward pressure? Already wall street is down 150,000 jobs. Foreigners are dealing with their own crises and are unlikely to be buyers. Can NYC avoid a major real estate correction?

Posted by: leftmanhattanneverlookedback at November 11, 2008 10:04 AM

I've always understood (perhaps mistakenly) that banks don't really want to foreclose on houses; they're in the money business, not the real estate business. Once a property is repossessed by the bank, it becomes more of a liability than an asset (especially in a down market like this one).

Perhaps by working with borrowers, banks are making sound business decisions. Perceptions about market health would be helped by a decreasing number of properties going into foreclosure.

Posted by: BrooklynButler at November 11, 2008 10:12 AM

BrooklynButler - you are correct. Foreclosure is the least desirable solution.

Posted by: crimsonson at November 11, 2008 10:23 AM

1842 -- agreed that if the borrower cannot repay a restructured loan then there is no point in doing much other than foreclosing.

Deadbeats are deadbeats, and I have no sympathy at all for people who borrowed money they could not reasonably expect to afford to repay -- especially because they are largely responsible for driving up MY housing costs the last few years as the end of the housing bubble coincided with me reaching a point in my life when I was tired of living in a crappy rent stabilized apartment.

In fact, my gut feeling is just to let all of these places get foreclosed as it will drive down property values so that when I eventually do buy a place it will be even cheaper yet. But I feel more and more like this is a case where my neighbors have built a poorly designed dam upriver from me, and while I may think they are irresponsible, selfish, and stupid, it doesn't change the fact that the bursting of the dam will drown me too, so it has become in my best interest to see their problems fixed.

As to mortgage backed securities... some of these bright financial geniuses who are using government handouts to fund the bonuses they are giving to each other this year will just have to figure out how to account for the refinancing. And if they claim the loan cannot be refinanced, then I say let the loan go into default, foreclose, let the MBS suffer, and issue a new loan to the current homeowner (if he is creditworthy, etc.) to buy the property.

Posted by: northsloperenter at November 11, 2008 10:32 AM

Mortgage rates are low because banks have collateral. If you don't pay, they can take away your house. The rates for unsecured lending, where the bank has no collateral, are much higher. Credit cards are a good example. So you can either accept the lower rate and accept that the bank gets to foreclose if you don't pay, or you can borrow at a much higher rate (in which case the bank still might be able to take your house, it's just a lot harder for them to do so).

Banks are facing a conundrum. They are all better off at the moment doing workouts en masse rather than flooding the market with foreclosures (which would just depress the value of their collateral). That's good business. But the problem is that the borrowing public and their less-than-sharp elected representatives will view this as precedent and expect banks to give everyone with a sob story a break. This could slowly turn secured mortgage lending turning into unsecured lending as a practical matter, which means bank will no longer lend at rates that have a built-in assumption that they can foreclose when someone doesn't pay. They will lend at higher rates that assume either that it is much more difficult or impossible to foreclose.

Step one sounds like compassionate and well meaning social policy, but the law of unintended consequences takes over and everyone gets screwed. Kind of like socialism.

Posted by: lechacal at November 11, 2008 10:40 AM

leftmanhattan - of course it can't and isn't. Prices are already falling. Where have you been?

Posted by: gkw at November 11, 2008 11:15 AM

leftmanhat - didn't you reat the NYTimes real estate section this w/e? - everyone is admitting prices are falling.

Posted by: dittoburg at November 11, 2008 11:23 AM

This talk about deadbeats is nonsense. I know two people in this situation, and both paid their mortgages faithfully until (1) the mortgage doubled from $2,000 to $4,000 a month -- this was in California and they had no idea this would happen -- they were victims of fraud and (2) the man lost his job and his wife needed an operation on her hip (this was in New York).

Posted by: mopar at November 11, 2008 11:27 AM

Guys, talk me down, OK? As many of you know, I rent. I rent because I can't responsibly afford to buy in NYC, and for now, this is where I want to live (and also, my job is here, and I have one of those advertising jobs that's hard to come by elsewhere). And I pay all my credit cards, and contribute to my 401K, and live a good clean financial life that Suze Orman would be proud of. But I am feeling like I got played for a sucker, because what I should have done as bought a house I couldn't afford and then gotten "bailed out" or "restructured." And I further feel that the efforts to shore up the housing market will ensure that I will NEVER EVER be able to afford to buy anything. So, please, someone with a greater depth of understanding of this mess, help a girl out. I did everything I was supposed to do. Why do I feel so stupid?

Posted by: I_haz_TWO_toilets at November 11, 2008 11:39 AM

haz, don't you worry, prices are going to keep coming down and you will be able to buy. Congratulations on your fiscal health. Prices are not going to be back to peak levels for many, many years.

Posted by: lechacal at November 11, 2008 11:54 AM

Nothing will shore up the market. Sit tight. Save for your down payment. Be ready to jump when the time is right.

Posted by: SnarkSlope at November 11, 2008 11:55 AM

Also, haz, bear in mind that these days a mortgage "workout" usually doesn't mean loan foregiveness in the traditional sense. It means some idiot who can't do math or understand basic financial instruments (probably like Mopar's friend in California) has their option ARM loan turned into a more traditional product that they are more likely to be able to actually afford.

You did the right thing. Trust me, you are much better off than almost all of these people who are getting workouts.

Posted by: lechacal at November 11, 2008 12:03 PM

BrooklynButler,

Citibank is "working" with borrowers because they've been essentially bribed by the US government (AKA taxpayers) to do so.

Banks normally give many chances to borrowers before foreclosing as a last resort.

Sub-prime mortgages are being turned into rent stabilized apartments. It's scary.

Posted by: IronBalls at November 11, 2008 12:13 PM

Unless fundamentals are changed.
I can't help to think that greed will rule the day again. This mortgage restructure and 700 Billion bailout will make some fat cat rich by taking a cut or siphoning the funds. I'm sure they will figure out a way to get a commission from appropriating this money to the sinking homes.

Posted by: Eigth ave at November 11, 2008 12:13 PM

"About time that the banks realized that renegotiating with someone to keep them in their home makes more business sense than evicting them and selling the property at a loss."

Nope! It's about keeping you a Debt Slave. If you are smart just walk away from that albatross. You credit will be bad but you will have extra money to spend. Screw the banks!

The What

Someday this war is gonna end...

Posted by: Return of The What at November 11, 2008 12:14 PM

OK, I'll hang in there in my little lifeboat. At least I have my two (rented) toilets to feel good about.

Posted by: I_haz_TWO_toilets at November 11, 2008 12:35 PM

The idea of mortgage moratoria is not a new one. It happened many moons ago...during the Great Depression. Although it had a positive short term effect, long term most people agreed that it increased borrowing costs.

Check out this study by a VP of the St. Louis Fed:

http://research.stlouisfed.org/publications/review/08/11/Wheelock.pdf

Posted by: BrookLynn at November 11, 2008 12:41 PM

Where to begin?
First off, it's ridiculous to compare people who are behind on their mortgage payments to people who stop paying their rent. Apples & oranges - typical nonsense [from a bitter renter?].
Secondly, returning the focus to Brownstone Brooklyn, it's unlikely anyone around here who bought any time during the 'peak' [2006-2008] now owes more than their property is worth. Yes, some people [myself included] could lose a few thousand dollars if we had to sell today. But because my downpayment came from the huge profits I made selling another co-op 2 years ago, that would be just a paper loss to me - not something that's life-or-death.
So while it's naive to expect the market not to sag, it's essential to keep the following in-mind:
-Prime Brooklyn is not dominated by spec buyers/flippers like the worst-hit regions of FL, CA, NV, etc.
-Co-op requirements excluded the most flagrant subprime borrowers [people with ARMs that would double within 2 years, etc]
-Many of the choices PS, CG, BH brownstone purchases were made with massive cash downpayments - or all-cash deals.
But what's most important is that the foreclosure crisis lowers all boats: consumer spending is the engine that drives the economy & it's directly tied to housing values. You may wag a finger at all those 'irresponsible' borrowers, but anyone who thinks that letting the housing market crater will suddenly give them the chance to buy is flirting with disaster. A collapsed market will likely cause skyrocketing interest rates [see the secured/unsecured loan comment from lechacal] which may well price-out all of you fence-sitters. And that's even assuming you could qualify for a loan due to tighter credit standards [which always favor existing home owners].
Personally, I think you can game the real estate market by finding specific undervalued properties or neighborhoods poised for growth. But timing the credit market is like timing the stock market: get out your dart board & hope for the best!

Posted by: parkedslope at November 11, 2008 12:53 PM

lechacal, have you been reading the Sarah Palin blog again? Socialism, come on. I know we've had our disagreements but I thought you were a little smarter than that.

There's no way that secured debt will somehow become unsecured debt. Foreclosures will always exist. As you rightly point out, loan modifications are good business when the foreclosure rate is so high. Rates may indeed increase as a result of this mess, because the Investment Banks' risk models have proven to be bogus, and rates are a reflection of risk. But the big change will apply to lending standards, as it should be. The risk modeling on sub-prime is what really contributed to this disaster. Banks will demand higher standards for lending, as they always should have, but they will foreclose when need be. It just won't be as often once you lend to a reasonable borrower, at a reasonable rate, via a resonable mortgage product.

Posted by: FatLenny at November 11, 2008 1:21 PM

Looks like the government is putting out its plan to restructure loans:

http://news.yahoo.com/s/ap/20081111/ap_on_bi_ge/meltdown_mortgages

News conference at 2:00.

Posted by: northsloperenter at November 11, 2008 1:23 PM

Mopar's California friend is not necessarily an irresponsible idiot.

I have a 5/1 ARM on a property that is about to reset. I recently pulled out all my loan documentation to see if there was any info about where it would go to. And I could find NOTHING helpful in the official loan documents. No "estimated future payments at index levels of XX" or anything as clear as that. All I found was an email note from my mortgage broker stating that it would "likely go up by about $500" a month.

So then I called the customer support line and asked them to tell me. And the customer support rep could only tell me what the current payment was and what index the interest rate was pegged to (1 yr LIBOR). But she could not explain how to use that index to do the math myself to figure out what my mortgage payments might be next year. I had to be "escalated" two times to get to someone who could even explain how the bank will determine the mortgage payments after I reset.

Lo and behold when I did the math following the methodology which will be used on the index's current rate, it turns out if my mortage was reseting now it would go up by $1300 (virtually doubling) and the principle repayment alone makes up more $500 of that.

Needless to say, my mortgage broker was somewhat misleading and the bank didn't do anything to insure that I understood what my future payments would be. We were not subprime and this is not a "fly by night" broker or bank. Luckily, I have the wherewithall to get and understand the information and we can afford the future payments.

But I have a LOT of sympathy for others out there who might not be so fortunate -- there was a lot of less than transparent dealing on the part of mortgage brokers and banks that contributed to people carrying debts they can't afford. You shouldn't need an MBA or a JD to figure out what your mortgage payments will be.

Posted by: pmmtenement at November 11, 2008 2:09 PM

pmmtenement, I accept that disclosure on these products has been inadequate. But I have little sympathy for those who didn't suspect that the too-good-to-be-true rate was in fact too good to be true. There was a lot of press during the boom about these toxic products and how much payments were going to jump for people signing on to them. It would have taken about two minutes on Google for any of these people to get a basic sense of the trouble they were getting themselves into.

FatLenny, I didn't say that mortgage restructuring constitutes socialism. I merely pointed out that, like socialism, it starts with a good idea that ends up hurting everyone.

Posted by: lechacal at November 11, 2008 2:20 PM

pmmtenement: not to harsh on you in a difficult time, but why didn't you ask about how your ARM would adjust before signing?
Personally, I can't imagine making a decision like closing on a purchase in NYC without understanding at least the basics of the deal.
And no, I don't have an MBA or JD.
This sounds precisely like the kind of willfully reckless behavior that lead to the current crisis.

Posted by: parkedslope at November 11, 2008 2:22 PM

While I feel for you pmmtenement, I find it odd that you did not ask and make sure you understood the reset after five years. They are always pegged to some rate, plus an additional spread, usually with an overall cap of how high it can go over the life of the loan, and sometimes a cap on the increase year to year. This is usually stated on the front page of the loan documents you sign which describes the initial rate and the reset formula. Not complicated at all unless you just were never given you documents in the first place. You sound intelligent, so I'm not sure how you could be duped into this.

Posted by: 1842 at November 11, 2008 2:29 PM

lechacal - There was just as much press about how great the products were. I did research at the time and on balance the press was positive. Moreover, many people who got these mortgages were first time homebuyers and did not have a sense that the rates were "too good to be true". In fact, 5 years ago (in spring of 2004) the rates were actually HIGHER than they had been over the prior 2 years (2001-2003) so, again, even if you were doing research you may not have seen that the rates were "too good to be true".

Hindsight is always 20-20 and I believe we should have a little more sympathy for regular people who made some regretable but understandable decisions in the circumstances.

Posted by: pmmtenement at November 11, 2008 2:30 PM

I was not duped, we are able to pay, and there was no "willful recklessness". Could we have been more persistent about getting exact potential future payments - yes.

But the idea that anyone who didn't realize exactly what was going to happen to their loan payment was a complete idiot is also not appropriately recognizing that the brokers and banks were not transparent at the very least and in some (well documented instances) downright fraudulent.

Posted by: pmmtenement at November 11, 2008 2:35 PM

"I have little sympathy for those who didn't suspect that the too-good-to-be-true rate was in fact too good to be true."

I have little sympathy for financial "professionals" who loaned money to people knowing that they likely didn't understand it and couldn't afford it.

But, here we are... bailing out Wall Street and Homeowners after their combined folly inflated then destroyed the credit markets.

It does make one feel more than a little sick, but it doesn't seem there is much of an alternative, unless economic collapse and massive unemployment somehow sound appealing.

Posted by: northsloperenter at November 11, 2008 2:49 PM

One of my many personality flaws is that I treat everyone who isn't as smart as I am like an idiot. And I'm exceptionally smart.

Posted by: lechacal at November 11, 2008 2:49 PM

Northsloperenter - Exactly what I was trying to argue but you stated more effectively.

Posted by: pmmtenement at November 11, 2008 2:59 PM

"One of my many personality flaws is that I treat everyone who isn't as smart as I am like an idiot. And I'm exceptionally smart."

Some unsolicited advice: Learn to value people for qualities beyond mental prowess.

Posted by: northsloperenter at November 11, 2008 3:44 PM

There seems to be a lot of searching for blame going on here, which is pointless. Somehow the idea that homeownership was a god-given right became as endemic in American culture as the aesthetic that required every kitchen and bathroom more than three years old to be immediately remodeled in order to increase "value."

I'd say there's a reason why sometimes interest rates should go up... the past decade would have played out differently if they had.

Posted by: Heather at November 11, 2008 3:47 PM

Pmmtenement, that is very interesting. Surprised there are no class-action lawsuits against the banks for not being more precise and forthcoming.

Re people who took out subprime loans with nothing down -- there may have been people in the business who thought they could flip houses. They should have known better. But it's the lax regulation, the subprime brokers, the banks and everyone who colluded with them to make money off the transactions who are to blame. They KNEW they were lending to people who couldn't pay.

Re the specific cases I know:

*My father, a high-earning engineer with a master's from Stanford, bought his last house with an ARM (not subprime) knowing it would reset and he would have to sell it before it did. He did sell it as planned and is now living in a rental in Palo Alto, where he has lived since high school.

*A middle-aged, married, Spanish speaking housecleaner with children. They bought a house (in Fremont, I think) with mortgage payments of $2,000 a month, which reset to $4,000. The family of four is now living temporarily with her brother in one room. She said they had NO idea the mortgage would reset, they were purposefully misled. I do not know if they lost a down payment. This is California, no lawyer is required.

*Here in New York, a 50-ish man and his wife, both Spanish speakers, no English at all, bought a two-family about two years ago in Bushwick. His wife needed an operation, he lost his job, and now the house is a short sale, I presume they are living there rent free but am not sure. They also have numerous renters, none of whom speak English and who work in grocery stores. I am not sure what the man does. Something along the lines of working in a grocery store or construction, I imagine. I don't know what he put down, if anything. These are hardworking, honest people. They are not irresponsible but I doubt they understood what they were getting into.

That reminds me: About a year ago, an arrogant contractor working in Queens and Long Island bragged to me about all the deals he'd done with people who were unqualified to own a house and didn't understand the transactions. He claimed the real estate agents would fill out the paperwork for the clients, who didn't speak English. So does that mean the lawyers were in the pocket of the real estate agents and mortgage brokers?

I just hope these people didn't lose down payments.

Posted by: mopar at November 11, 2008 6:49 PM

Absent outright fraud, how can anyone credibly claim that they had no idea that the interest rate on their loan, which is called an Adjustable (emphasis) Rate Mortgage? Yes you could argue that it was irresponsible to issue these loans, but its similarly irresponsible to accept them -- a real estate folie a deux.

Posted by: cortnyc at November 11, 2008 7:01 PM

re: future mortgage rates.

Ridiculous to think that anything other than MBS spreads/pricing will be primary determinant of future conforming mortgage rates (this excludes treasury-based or libor-based Arms that have already), especially the ridiculous idea that secured lending is slowly becoming unsecured ledning and as a result, mortgage rates will rise.

For purposes of refi ing (if you can), I suggest anybody who has an Arm resetting follow religiously the mortgage news daily MBS blog. He provides live color on daily MBs pricing. Also go to HSH mortgage rates sight, click on Ny and see the many brokers/lenders who publish their daily rate sheets (which again reflect recent MBS activity). These sights provide us home owner fools, which we ALL are when you are at the mercy of one of the most opaque industries out there, at least some ammo when talking with lenders. In other words, we ALL have in some way been taken for a ride by our lenders be it with an orgination fee, the quarter point lender mortgage tax built into your point, the point itself, the ysp premium he takes that you have no verifiable way of knowing what it
is, a ridiculously high app fee in some instances, a processing fee, etc.... If don't think you have been juiced in some way, then you are clueless.

Posted by: k91 at November 11, 2008 7:42 PM

As a TIL (Truth In Lending) requirement, all fees including YSP, etc. are disclosed to the borrower in writing. If they weren't, then you have a case against your lender. If the lender takes out PMI and bundles it into your rate, I don't see the harm in that. It's hardly hidden. It's in your rate!

Posted by: FatLenny at November 11, 2008 10:58 PM

« Redevelopment Stalled in Red Hook Celebrating the Shoe Repair Shop »

November 11, 2008

Citigroup Puts the Kibosh on Foreclosures

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