Keys for Cash: Inmates Run Asylum
I have an offer for you guys... I will loan you dollar amount X, which you will use to purchase asset Y. You will pay me back an amount less than what I loaned to you originally. Let's call that amount Z. Your goal will be to keep Z as close to zero as possible. You will carry out your goal for as long as possible.
In the meanwhile, I will send you many scary letters demanding a higher amount of Z, leading up to a total of X plus interest. You will ignore. I will send you even more letters and they will be even more scary. You will ignore those, as well. I will then offer you an extra $21,000 to give me back asset Y, purchased with amount X of which you returned Z. Oh yeah, did I mention that asset Y is worth somewhere between 15 and 50% less on the open market then when you originally bought it?
Now...devise a function or equation which adequately presents the inherent risk and potential returns for both the provider and taker of the original loan. Many SBs will rain upon thee if you can find a way to show how this procedure makes sense in this...or any other universe, for absolutely anybody involved.
If you think this is a joke or not a very realistic scenario, go ahead and read on. Apparently, the five biggest U.S. mortgage servicing institutions were offered this shit stew smorgasbord by the FDIC as part of the proposed industry-wide "cash for keys" program.
The apparent logic here is that if banks pay borrowers who are more than 90 days behind on their mortgage $1,000 for independent financial counseling and up to $20,000 in cash as a “fresh start” payment towards living costs in a new home... things would somehow improve...All the defaulters would have to do is vacate their properties quickly and leave them in good condition...
Side notation: Add variable "+/-CH" for "did/did not leave asset Y in crack house condition.
Now proceed to please explain to me what the fuck is going on here?
Can I at least have a fucking bad guy in this shit stain of a movie? This endless production that is hampering the entire American and (tangentially) the entire Global economy is getting another sequel?. Really?
The FDIC, BofA, Fannie, Freddie, the American idiot house buyer, the populists, the poultry, the liberal idiots and the conservative retards... all of the unusual suspects are present for another round of pin the tail on common sense.
Somebody please explain to me why this proposal makes any sense and more importantly for whom? Better yet, how are you ever going to convince future generations of Americans to buy homes while you continue with this insane attempt to reflate Y to a level on which it never stood in reality.
Amazing how the Kool Aid can get everybody drunk, when the same diseased cup is passed around long enough. Apparently, punting on 1st down is the new offensive strategy of choice. Good riddance to rational thought!
Homeownership is a God-given Right.
Freedom Fries.
Sometimes I wonder if you possess an undergraduate education, Midas, as your posts on current economic events often lack an understanding of the issue followed by some crack pot analysis. Feel free to confirm, deny or remain silent on this point but I am pretty curious.
First, you asked people to conjure up a loan profitability equation for this scenario as though this was the reality at loan acquisition. This is not at all what the FDIC, Treasury, CFPB are advocating and represents either a lack of understanding of the situation or a fairly transparent attempt to straw man.
Second, this is in response to robo signing and other foreclosure without proper documentation scandals. Large mortgage holders are attempting to foreclose on homes they don't have the legal authority to foreclose on either because they lack the proper documentation or in some rarer but well publicized cases are foreclosing on homes where the mortgage is held by a different bank or have no mortgages at all. This is a massive regulatory violation and reputational risk. So the options for the bank are take this or some kind of deal, make payouts and take another wave of massive write-downs or face waves of class-actions lawsuits, suits by federal and state governments and tons of bad PR. Pick your poison.
Third, the case that the FDIC and CFPB are making is that the responsibility for wholesale mortgage fraud of the US government by issuers should get passed along to the eventual mortgage holders (largely big banks) because they failed to conduct proper counter-party due diligence. This is legitimate criticism and simply means bad underwriting will lead to losses. What a novel thought.
Fourth, how exactly does this inflate home prices? You take people with LTVs of greater than 1 and pay them to leave a property. That property is then for sale at market price which is substantially lower than its last sale price. The former "owner," who the bank may or may not actually ever be able to evict on account of documentation shenanigans, now has 21 grand and absolutely ravished credit in an environment where new home loans are typically requiring 80% or lower loan to value. In lamen terms that means homeless dude isn't going to be in the market for a house like the one he left for quite some time. The end effect is that regional housing prices decline further and maybe you can make the argument that rental prices go up (but most places with significant tracks of toxic mortgages also have crap job growth and if you had a "fresh start" I'd imagine you’d go elsewhere but that's just me spitballing).
So in conclusion, housing supply goes up, housing prices go down and banks are forced to take further write downs that probably are a closer reflection to what their loan book would be if forced to mark to market (as a side note, nobody wants to mark to market when shit goes sidewise, go figure). I don’t presume to know what the net effect this would have on overall home ownership levels, but my guess would be short to medium-term decline.
I'd like to think I laid this out pretty simply, it actually isn't terribly complicated when you think it through. Then again maybe it's all the Kool-Aid I've been served while getting an education and actually working for a bank. Though to be totally fair this as an enjoyable way to spend 20 minutes so maybe you are onto something with this blogging for a living deal.
The net result is simple, the banks fail again, obama screams at the top of his lungs that the big bad banks are irresponsible yet again, people get pissed and riot in the streets, obama chuckles to himself in the oval office, America gets closer to socialism, obama is gleefully cheering in the oval office.
This whole fucking thing is a pile of shit, personally the "robo forclosure gate" crap is so overhyped. I would bet that over 99% of the forclosures that were handed out were way past what is normal forclosure zone to begin with. I personally say we stick the idiot and liar homeowners with the a note they have to pay off and forclose on their house. If the house gets auctioned off for 50% of what the home owners owe well thats just too fucking bad, the previous owners who got forclosed on have to pay the difference. Thats the way it always was and thats the way it should stay.
this was too long to be enjoyable.
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