The best evidence that Obama’s new mortgage scheme won’t end well: look at the people who are the most excited about it. It’s the same, smarmy mortgage guys that profited handsomely from the subprime crisis. In a great bit of deep dive reporting over at Salon — hardly an outfit you’d expect to be critical of Obama — Alyssa Katz, with help from The Nation Institute (also very liberal), shows how modifications are hardly the paragon of progressive idealism:
Some 40 mortgage brokers and real-estate agents are gathered at the Long Beach Hyatt on a balmy Friday in January to attend a seminar conducted by broker Allen Brodetsky and local real-estate attorney Steve Vondran. The mortgage business might have collapsed, but those assembled in the glittering ballroom have each paid $195 so Vondran and Brodetsky can teach them a fresh way to make money off of other people’s debt.
“The Department of Real Estate has granted brokers a whole new product line you never had before,” says Vondran, as the Dockers- and Ann Taylor-clad crowd read from fat binders and ponder the unfamiliar terms in Vondran’s PowerPoint presentation — “LOAN AUDITS,” “QUALIFIED WRITTEN REQUEST.”
The new product is a loan modification.
But what are loan mods?
Brodetsky then shows the group at the Hyatt a redacted photocopy of a loan modification he recently secured. It cuts the borrower’s monthly payment to about $1,500 — half of what it would have been if he or she had to pay the full amount owed.
Unfortunately for the borrower, however, is that the remaining debt doesn’t vanish. Those unpaid tens of thousands are waiting there to be reckoned with down the road, plus years of additional interest. “Isn’t that predatory lending?” gasps one of the attendees at the Hyatt. Vondran and Brodetsky change the subject.
Yves Smith makes a similar point, and asks whether we should hope that the whole thing fails:
So effectively, the borrower gets a teaser that over time adjusts to a fixed rate mortgage at current (low) interest rates.
Let’s think this through a second. The borrower is still under water (of course, Bernanke & Co. regard this as temporary misvaluation resulting from irrational pessimism, but the more data driven crowd sees housing prices as having moves way out of line with incomes. And the outlook for incomes isn’t exactly rosy either). The borrower therefore has no reason to invest in the house, including routine maintenance (assuming he can somehow scare up the dough). If the boiler goes, the roof leaks, he has no incentive to fix it. Similarly, if he were to sell the house (let’s say he got a good job elsewhere), he’s still faced with either negotiating a short sale or walking and leaving the bank with the property. Thus for the bank all this does is kick the can down the road, unless we assume a recovery from these levels.
John Carney made this point right away, when the initial plan was first announced. Its teaser loans all over again. So why do Obama & co. think it might work this time. It’s as Yves says, the optimism that this is all a big dislocation. The same belief that we’ll be able to “get the economy back on track”, tax hedge funders some more, pay down the debt and grow 3.2%. It’s all sippin’ the Kool-Aid.