Academic Shares Pitiful Results of Recent Loan Modification Efforts by Lenders
I recently found a well written, very pointed article with solid research about the results of loan modifications made by lenders and servicers before 2009 and wrote this letter to the author, a Valparaiso University professor (Alan White) studying the loan mess we have created.Here is the letter:

Dear Professor White,

I am happy I found your link at http://www.creditslips.org/creditslips/2008/12/what-is-a-loan-modification.html .  I am grateful that you are so active in objectively identifying and recording the failure of current “kick the can down the road” loan modification efforts of  lenders and servicers in the absence of tougher legislation.

I am not an academic, but have SFR Real Estate industry experience and I have been studying and writing about the mess we have created with the current credit bubble. I have a blog at http://unsustainabubble.com/ and I will be adding a link to your latest Wholesale Data on Loan Mods to support some of assertions in my earlier entries.  I hope you will take a look and tell me what you think.

As you know, we are witnessing one of the greatest transfers of wealth in the history of the country (world?) through the deleveraging process and the bailouts. I was amazed to see that John Paulson’s hedge fund (the one that bet against the equity tranche of sub-prime loans and made a 580% return for investors in ’07 and $3.7 Billion in compensation for Mr. Paulson (not a bad year by most standards), is one of the investors in the purchase of IndyMac with George Soros and others.  If this is not the socialization of losses, I will eat my flat hat. 

Too bad you and I don’t have $13 Billion to buy a $179 Billion loan portfolio and 33 bank branches with government (unwitting, unborn and uncaring taxpayer) guarantees.  Who would not go for that deal? Is this what they mean by the privatization of profits? Perhaps this is not so amazing after all but merely a side benefit of being one of the cognoscenti.

The most interesting recent news I have seen is the (about face) new support from Citi on Bankruptcy Cramdowns at: Bank Industry Slams Citibank Deal http://www.portfolio.com/news-markets/national-news/reuters/2009/01/09/bank-industry-slams-lawmaker-citi-mortgage-deal  .

Perhaps $45 Billion or so of taxpayer funds includes with it some social responsibility, but from that crowd I seriously doubt it. (Check out the history of Citi bailouts in “Bad Money” by Kevin Phillips for a real belly laugh).

While I am convinced that the Mortgage and Banking industry lobbyists will succeed in halting any legislation that allows abrogation of existing contracts, this kind of pressure may well force lenders and servicers to take some current losses and allow more sustainable loan mods, or is just a tour de force in Public Relations. I think by the time all is said and done, this type of effort will be too little too late.  The hue and cry of the industry that cramdowns will further restrict credit and increase mortgage rates is undoubtedly true.  Lenders have already increased every fee and insurance premium they possibly can to improve profitability. What few loans they make will be sound once more and based on sane DTI’s and profitable long term fixed rates.

No Bair like program of systemic “kick the can” modifications will work as they are still too biased toward lenders and do not address the basic affordability issue created in many areas by the bubble.

Dropping or subsidizing interest rates for the well qualified will not solve the affordability problem for people with a real hardship or for new buyers.  The unintended consequence of this effort will be that people with assets and good credit will pay less interest for their homes, even if they could afford more.  Is this what the government means by trickle down?

Given the gutless, pandering legislation we have seen so far, I am convinced that the strength of the financial service lobbies will triumph over any realistic, legislative approach to loss mitigation that keeps people in their homes (short of violent mass protest in the streets).  The result of kicking the can down the road will be a much worse cascade of foreclosures and the market will ultimately decide (despite record “quantitative easing” or any other more tepid remedy) where the bottom is for housing prices.  I feel strongly that  RE pricing will overcorrect (at least in the bubble areas) to pricing below the historical mean within a couple of years.

I know the deleveraging must happen but fear the social consequences because I don’t believe that printing money and giving it to the big banks will accomplish a thing, except allowing them to subsidize their losses for a period of time (and get them off the books in secrecy) and perhaps acquire a few bargains among the banks allowed to fail.

Nothing is going to make people spend again at bubble levels because too much wealth has evaporated and one of the unintended consequences of “Globalization” clearly is bringing back a two class society in America.  Without a decently compensated middle class, housing prices will continue to fall along with rents.  So much for the “Ownership Society” and welcome back to economic serfdom! Making new financial instruments will not replace lost manufacturing productivity and the creation of real wealth.

Too bad for the average person who would rather travel to the inauguration or spend time playing Guitar Hero (Headline? Guitar Hero Fiddles while Rome burns?) or texting buddies than participate in any form of real protest against the ongoing, grand scale taxpayer swindles.  Based on his choices of Economic Advisors, (Robert Rubin? $115M+ Compensation from Citi since ’99 and a long history helping inflate the bubble under Clinton) Mr. Obama is not planning to rock the boat either. We will have the best Government money can buy regardless of party lines.

On the other hand, perhaps Mr. Rubin and his cronies will have an epiphany and each donate their entire net worth to a non-profit designed to help homeowners keep their homes…