By Moe Bedard
CNBC’s Rick Santelli isn’t a happy man. Referring to the millions of suffering Americans as “losers” Santelli spews forth some of the vilest verbiage I’ve heard in the foreclosure prevention debate. Santelli argues the new administration should use their powers of social media to determine how the average American feels about President Obama’s foreclosure prevention plan saying:
“…have people vote on the internet as a referendum to see if we want to subsidize the loser’s mortgages.”
“You know,” Santelli said “Cuba used to have mansions and a relatively decent economy. They moved from the individual to the collective. Now they’re driving ‘54 Chevys.”
Here’s Rick Santelli flipping out on CNBC:
http://www.inquisitr.com/18433/rick-santelli-flips-out-over-foreclosure-relief-video/
Thankfully, Santelli isn’t the only commentator today. On the opposite side of the spectrum, Wilbur Ross, owner of the third largest mortgage servicing company in America feels Obama’s plan doesn’t do nearly enough for the American consumer.
http://www.housingwire.com/2009/02/19/wilbur-ross-obama-foreclosure-fix-not-enough/
“The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,” Ross told HousingWire. “They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default.”
The Homeowner Affordability and Stability Plan does some of that, but doesn’t go far enough, Ross suggested. “The have to reduce the principal amount of loan, not just nonperforming loans, but also performing ones,” he told CNBC. “Why should a guy who’s not paying benefit, while some poor citizen who’s struggling to make the payments gets stuck with the mortgage?”
His own plan looks something like this:
1. The lender takes a write-down in principal, and the servicer takes a similar hit on any servicing strip on the newly-reduced UPB.
2. After principal reduction, the government guarantees half of the remaining principal the lender now holds.
3. This guarantee of half the principal can now be sold into the securitization market, which will give the lender an income stream on the home again and offset some of the losses the owner of the loan has to take when they write down the principal.
4. When the house is sold, if the value of the home has gone up at the point of sale, the homeowner and the lender share in the profits earned on the gain.
Ross isn’t the first to suggest a home equity sharing plan, and there are clearly strong complexities in how any such plan would be put together, particularly as it relates to second lien holders and/or investors in junior bond classes. But the fact that a large investor with such a strong hand in the servicing business is suggesting it’s possible at all to accomplish is something that perhaps bears more attention than the idea has been getting as of late.
While Ross has much to say on the topic, Realtors and Economists have mixed views of the plan.
“Doing nothing is not an option,” said Philadelphia economist Kevin Gillen. “But doing anything and everything isn’t necessarily better than doing nothing.”
TD Bank N.A. chief economist Joel L. Naroff said Obama’s plan was a “real good start” that should help cut costs and reduce foreclosures.
“We can all debate the fairness of this, but ultimately, we have to stabilize the housing market, and this is one part of the process,” said Naroff, who is based in Cherry Hill.
Philadelphia mortgage broker Fred Glick is a bit uneasy.
Glick cannot see incentivizing bad behavior by riding to the rescue of the people who caused the problems: bankers who made bad loans, and borrowers who borrowed more than they could afford.
If the program targets homeowners whose mortgages now exceed the value of their houses – referred to as “under water” – “then simply let Fannie Mae and Freddie Mac refinance these loans without requiring an appraisal,” Glick said.
While The views of Realtors and Economist’s are mixed, one attorney sees potential in the new Administration’s plans.
Bruce M. Sattin, a Lawrenceville, N.J., lawyer, said that plan had “possibilities” for the troubled borrowers he represents because it makes modifications mandatory for Fannie/Freddie loans.
Sattin also cited as a positive step Obama’s willingness to change the law to permit bankruptcy judges to modify home loans.
Still, “the devil is in the details, and we have not yet seen the details,” said Sattin, of Szaferman, Lakind, Blumstein & Blader.
“Right now, the plan looks like it might make it easier for housing counselors to negotiate favorable loan modifications for struggling clients,” said Farah Jiminez, executive director of the Philadelphia counseling agency Mount Airy USA.
“But push conventional lenders too hard into a defensive posture, and we may find that we’ve only opened the door wider for subprime lenders to victimize a new community of buyers,” she said.
The Obama plan focuses on rewarding lenders for efforts to rid the market of these troubled assets quickly.
Peter Buchsbaum, of Arlington Capital Mortgage of Jenkintown, said he believed that changing bankruptcy laws would have a greater impact than offering a $1,000 incentive to mortgage servicers for every loan modified.
The fact that the government would require modification makes Buchsbaum uncomfortable. “But if my tax dollars are being spent to help the balance sheet of a bank that made a poor decision to lend money,” he said, then the government should be allowed to require it.
Even when mortgages are modified, the end result in many cases is a higher payment. Government surveys show that more than half of the loans modified in the first six months of 2008 slipped back into problems before year’s end.
Brian F. Duross, who lives in the Pennsylvania suburbs, modified his 8.5 percent adjustable-rate loan in July to an 8.5 percent fixed rate, but after his mortgage servicer tacked on late payments and fees to the balance, his monthly payment was the same.
“The problem is people like me who legitimately try, are not helped by that,” said Duross, who contacted the lender in January for a further modification, but has not heard back.
“I guess they are waiting for a bailout,” he said.
Because the Treasury Department will establish guidelines for mortgage modifications, Patricia Hasson, president of the Consumer Credit Counseling Service of the Delaware Valley in Philadelphia, believes that the results will be better than letting lenders go their own way.
“I think that would cover the major players, if not all” of them, she said.
Economist Gillen maintains that both mortgages and the homes that securitize them must be marked to market, meaning “that the values of both need to drop, but not by too much.”
Second, the government needs to distinguish between deserving households and undeserving households, not just between flippers and primary buyers.
“My biggest concern remains the long-term moral hazard this will impose,” Gillen said. “The administration runs the very real risk of signaling to the public that making stupid decisions is OK, provided that enough people make them.”
Ron Utt, a senior research fellow at The Heritage Foundation, notes President Obama is proposing to spend $275 billion on a problem that does not exist yet.
“This establishes essentially a new right, that is, people who are current in their mortgages, who aren’t having any problem making their payments but are unable to, let’s say, refinance at a lower rate because the value of their house has fallen,” he explains. “Well, what we have is sort of this massive program here to allow those people to refinance.”
To address the home foreclosure problem, Utt believes the government must first find out why the existing mortgage loan “workout” plans have been such “miserable failures.” He notes the current success rate of the federal workout plans is about 40 percent after six months.
Moe’s Comments:
Differences in viewpoints are healthy for consumers of the media. However, Santelli is, in my humble opinion, way out of line. Should we label so-called banking experts that chopped up mortgages in to derivatives impossible to track as losers? Should we call the executives of companies that take government money and pay hundreds of millions in bonuses losers? Who knows…what I do know is that Santelli should be fired. Referring to American homeowners in distress as losers is not only detrimental to public debate, it’s patently un-American.
Sources:
http://www.msnbc.msn.com/id/29272098/
Industry reaction to Obama plan lukewarm
http://www.housingwire.com/2009/02/19/wilbur-ross-obama-foreclosure-fix-not-enough/
http://www.inquisitr.com/18433/rick-santelli-flips-out-over-foreclosure-relief-video/
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