Mortgage bailout declared futile
February 21st, 2009, 3:00 am · 43 Comments · posted by John Gittelsohn
mortgage.freedomblogging.com
Bob Simpson, president of Imarc Investors Mortgage Asset Recovery Co., an Irvine firm that investigates why home loans go bad, says no federal mortgage rescue plan can save people from having gotten in too deep. Simpson says he’s seen thousands of people fail to pay mortgages for which they were not qualified. He anticipates seeing tens of thousands more this year, no matter what the government does. Excerpts of his conversation with the Register…
Q. What do you think of the President Barack Obama’s $75 billion plan to help troubled homeowners?
A. It’s not going to help us much in Orange County. First, people have to prove they qualify for loans. You can’t fake it anymore, which means a lot of people are out. This also applies only to Fannie and Freddie loans, which doesn’t include half of the people here with home loans.
Q. Who does it help?
A. It helps if you’re upside down on your home, but only up to 105 percent loan-to-value. The problem is, we peaked at about $635,000 average home and now we’re below $400,000. So we’ve got a ton of people who owe $500,000, $600,000, $700,000 and they can’t be helped. This plan won’t work in California, Florida, Arizona and Nevada — which account for more than 60 percent of foreclosures nationwide, because the values have fallen too far.
Q. Won’t that depend on the appraisal you get?
A. That’s the next wave of fraud: appraisals, because that’s what stands between you and refinancing. You might get an appraiser to say your house is worth that much for a refi. But I bet you can’t find anybody to buy it for that much.
Q. Doesn’t the Obama plan also offer people who are drowning in debt help to reduce their monthly payments to something like 38 percent of income?
A. That won’t help in Orange County. If the median household income here is about $85,000 — and that was before the crash — then 38 percent of that comes out to about $2,291 for principal and interest per month. That’s a $426,000 mortgage with a 5 percent interest rate. The problem is, people in Talega, in Rancho Santa Margarita, in Ladera Ranch, they’ve got homes for $500,000, $600,000, or $700,000 with 100 percent financing. Who’s going to write that down? Who’s going to pull the trigger and say my bank will take a $200,000 hit on that mortgage? Who in the loan-servicing department has that authority?
Q. Is that a piece of the puzzle that’s been left out?
A. I haven’t seen anything in this plan to protect loan servicers from investors, who are going to scream if there’s a write-down on their debt. That’s the next group we have to protect: The loan servicers. There has to be an authority and a competence to understand the ultimate loss to the bank is less than taking a home to foreclosure and that competence is in short supply. That’s really meddling in the free market.
Q. So what’s the alternative, letting things fall apart?
A. It is going to fall apart. Loans are worse than anybody realizes. There was the program under Bush, HOPE for Homeowners, and the numbers of people it helped was infinitesimal. At this point, people have to understand there isn’t enough money for everyone who wants to keep their house. And for every sad story, there’s 20 wheeler dealers who bought properties and abused the system and borrowed too much money. People who make $200,000 and bought a $500,000 home that’s now worth $300,000, I feel sorry for them. They didn’t lie and their house fell in value. But that’s not the story of most people in Orange County.
Q. So how do you stop the free fall in prices?
A. I have no interest in propping up a market for people who gambled on real estate values. Imagine a world of $150,000 houses. That would be fabulous. I say let prices fall to where normal people can afford them, people who qualify for loans, people who live within their means.
Q. How do we get there?
A. The market is a cruel and cold place. Let’s walk through this: If a guy’s over his head, he gives up on the house and goes and rents an apartment. And then in a few years, he goes out and buys a place for $235,000. That’s not a bad future.
Q. So you’re saying it’s better for society for people to file for bankruptcy or walk away from their homes?
A. Give up their homes, unquestionably. The reason is that paying a $5,000 a month mortgage when the home has no equity, you have no asset to protect. You could give it up and improve your cash flow and improve your life. People have to recognize they have nothing to protect if they owe $600,000 on a house worth $400,000. Those values aren’t going to come back soon, because people can’t fake it anymore.
Q. How many people should walk away from their homes?
A. I couldn’t give you exact numbers. Probably anyone who bought a home after 2000 is going to be underwater. I don’t think that’s a stretch.
Q. Is there any way the government can fix this problem?
A. The answer is people need to get their financial house in order. That means making hard choices and stop pretending you can have everything. Sell the Beemer. Get the kids out of private school. Give up the boat.
Q. At what point do people decide to do this?
A. When you’re losing sleep. When you buy something and it causes a fight with your wife. I don’t want the government telling me how to spend money. I don’t want Barney Frank helping (my wife) Janene and me decide what’s best for our budget. Yet that’s exactly where we’re finding ourselves the way things are going. What people have to do is give up living above their means.
Q. So won’t there come a point where people cut back on spending so much that the economy collapses more? Isn’t that the paradox of thrift? Isn’t that what caused the Depression?
A. You’ve got to go Keynesian and have the government out there spending. That’s what the stimulus is for, to make up for lost demand. In the Depression, you had the government building Hoover Dam. That’s good. The stimulus is good, but a bailout of bad mortgages is futile.
Q. So what’s your bottom line? Stimulus good, bailout bad?
A. That’s pretty accurate. The (mortgage) bailout’s futile. It will ultimately disappoint. |
