Posted tagged ‘mortgages’

Even When They’re Right, They’re Wrong.

July 8, 2011

So, the banks, some of them, finally figure out that (some) loan modification is better than the alternative:

Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.

Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.

Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.

Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure.

All well and good.  Option ARM’s, the particular class of loans the banks are now modifying, allowed  borrowers to pay no principal, and only part of the interest each month — with whatever interest they chose not to cover ending up as additional loan balance encumbering whatever poor structure to which it is attached.

Those are clearly financial anti-personnel devices,* and it’s probably not a bad idea to try and defuse some of them before they blow. Or at least that’s the reasoning reported:

Bank of America and Chase inherited [interesting choice of word, there, don’t you think? — ed.] their portfolios of option ARMs when they bought troubled lenders during the housing crash.

Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought Washington Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid principal balance of $8 billion, still has $33 billion of them in its portfolio.

Bank of America acquired a portfolio of 550,000 option ARMs from its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages.

Dan B. Frahm, a spokesman for Bank of America, said it was using every technique short of principal reduction to remake its loans, including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.

“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said.

But the infuriating thing about this story is, of course, that the banks have chosen to help out loans (and people) not yet in deep trouble, but are witholding such aid from those who need it most:

The concern the banks are showing for those who might get in trouble contrasts sharply with their efforts toward those already foreclosed. Bank of America and Chase were penalized last month by regulators for doing a poor job modifying mortgages in default.

Adam J. Levitin, a Georgetown University law professor, said these little-publicized programs were more evidence that the banks were behaving in contradictory and often maddening ways.

“Loan modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,” he said. “Homeowners of any sort, whether current or in default, would rightly be confused and angry by this.”

So, while I’m glad that something is finally being done to modify loans made through one of the worst ideas in the history of finance, this story actually highlights the much larger failure to deal with the financial and social catastrophe of the broader failure of the home mortgage market. The foreclosure mess is a disaster because it simultaneously has generated a feedback loop of decline in many housing markets and it breaks communities.  Nothing good happens in a neighborhood where too many houses are unoccupied.

DFH’s (Atrios/Duncan Black comes most prominently to mind, but there are plenty of others) have been pointing this out for years now.  And at last, even The New York Times seems to be noticing, even as it documents what may be the first crack in the bankers’ resistance to grappling with their losses.

Welcome to the party, I guess — and, so as not to seem ungracious, let me not say “what took you so long,” to plead instead for much more attention on “the loan modifications that should be happening” to come.

*PS: no doubt, someone, somewhere (Brooks? Will?) must soon instruct us that these clever little monetary claymores were somehow the love-children of FDR, LBJ, Malcolm X, the Big Dog, and Howard Dean.  But, in fact, this is your invisible (and never-to-be-regulated) hand in action.

Image: Jan van Goyen, Peasant Huts With A Sweep Well, 1633

David Brooks is Always Wrong Too: Why Does Brooks (And The Republicans) Hate Contracts So Much?

September 24, 2010

DougJ over at Balloon Juice highlights this latest bit of sleight of hand from that genial con, David Brooks:

Financiers send the world into recession and don’t seem to suffer. Neighbors take on huge mortgages and then just walk away when they go underwater.

Now, I’ll have more to say about this column, as it is yet one more textbook case of bad faith, ignorance and, I’d wager, deliberate, useful error. (There’s a nastier term for that, but people of Mr. Brooks delicate constitution tend to faint when Anglo-Saxonisms slip into the discussion, so I’ll let y’all fill in the gaps.)

But here I just want to say something that seems to me so obvious that I hadn’t bothered to point it out yet.  That is, the difference between the two poles of this false dichotomy lies not just in the kinds of disparities Doug points out:  financiers who get rich by destroying the fabric of civilization are not quite the same as individual home-owners.*

Rather, or additionally the nature of the act committed by a financier betting the firm (but not his compensation — see Michael Lewis’s The Big Short for blood-pressure raising details if you are interested) is fundamentally unlike that performed by a mortgage borrower dropping her or his keys.

The financier has obligations — fiduciary ones to investors, and social ones that derive from the claim that finance plays an essential role in building a prosperous society — the argument used to justify outsize compensation and the rest.  There are legal ones too:  no fraud, no insider dealing and the rest.  This raft of requirements add up to a duty of care that our robber barons clearly failed to meet over the last few years.  They broke the social compact, and they continue to do so, IMHO.

Home owners, mortgage holders, by contrast, have a very specific set of obligations, defined in a contract.  Failure to perform their commitments under that contract carry specified, limited consequences, known and agreed to by both sides.

Anyone whose bought a house knows this very well; dealing with all this is why a closing takes a couple of hours, 975 signatures (I made that number up) and so on.  You learn that you are bound to pay the mortgage as scheduled, pay your taxes (when not escrowed), keep insurance on the property and so on.  If you choose or are compelled to cease to do so, the lender has certain rights, of which the chief is to seize the property on which it holds the mortgage.

That is: you don’t pay, they get your house.  That’s not a moral failing (unless the lender defrauded you, of course — or you lied to your bank); that’s a contract.  You can pay or not, and different outcomes, spelled out, result from either of those actions.

It’s a contract!  We love contracts, property rights, the rule of law — don’t we?

No we don’t.

Not if “we” happen to be conservative, especially if we slip into the skin of a faux “values” arbiter, or a glibertarian.  Contracts have two sides — but Brooks, and folks like Megan McCardle, who predictably wrote similarly breathlessly about the bad behavior of folks exercising their rights under perfectly clear (standard!) contracts a while back, only recognize that part of the contract that benefits the approved parties, the rich, the powerful, the institutional.

Surrendering a house that you cannot pay for may reflect all kinds of things about you personally:  everything from your status as one of millions of collaterally damaged folks undone by global financial disaster and global economic shifts to your actions as a lying scumsucker of a social climber taking advantage of easy money to live high for a few years.  (In which case more than ever, caveat lender.)

No where along that spectrum though, is that behavior anything but perfectly acceptable under the long-held practices of a contract-ruled social and economic system.  That’s a little different from what the banksters did:  stack up a huge pile of dry wood (the financial system, overleveraged through derivatives created for no economic purpose), add gasoline (an insurance scheme that had no actual solvent counterparties guaranteeing loss payouts) and then stand around flipping glowing butts at the pile just to see what would happen.

That Brooks refuses to see the difference between individuals acting as their legal constraints permit them, and those who thus played chicken with the entire global banking system is a measure of his mind.  To me, it says that he is a shill, a hack, a dishonest broker.  YMMV.

*Demonized here as deluded climbers — the “huge mortgage” trope.  If you actually start digging into the numbers that’s bullshit, as one might guess considering (a) the source and (b) the fatuous blanket quality of the statement.  This is a Brooks tell, how you know that he is a propagandist, and not an original thinker.  I’m still tracking down precise data, but a place to start to get a handle on mortgage size and delinquency would be this HUD report to Congress on the root causes of the foreclosure crisis.  A key point there:  it was house price appreciation, not the magnitude of the price of a given home, that seems to have driven the bus when it comes to the collapse of the bubble and the foreclosure crisis.  Brooks is doing a shifty bit here, that is, blaming individual moral failings instead of the much more complex and society-wide issue of why prices rose so unsustainably.  That has obvious policy implications, which is the point: Brooks plays a clever game, and it takes some digging to get past the easy and plausible generalizations with which he masks his real aim.

I don’t know nuthin’ ’bout economics, but…: NPR/Henri Poincaré/Mortgage follies edition

February 25, 2008

Innumeracy is a problem I have and will come back to a lot here. But as I listen to more and more popular presentations of technical subjects, I still get astonished by the intersection of two structural problems in the media.

That is: many reporters — not so high a proportion of self-described science writers, though still plenty there — have trouble with even the most elementary uses of quantitative approaches to their stories because they just don’t think in numbers at all. That’s the negative way of framing the problem; journalists have a lack that inhibits their capacity to do good work in an ever-more technically imbued world.

Then there’s the affirmative problem. Reporters establish stories by anecdote, by individual bits of data, single episodes. They’re called stories for a reason: the goal is to perform one of the most powerful acts of communication humans have figured out, to convey information that compels belief because its hearer can place themselves right into the narrative.

That’s why, to edge closer to the real subject of this post, so much of the reporting on the mortgage crisis (fiasco) centers on some family that’s about to lose a house, and spend little time, on the meaning of the big numbers, like the implications of a repricing of US housing on a large scale.  The point is that not only do many journalists not know a set of ideas that could help them figure out such things;  what they do know leads them away from the kind of approach to their work that more mathematical sophistication would provoke.

But there’s a wonderful passage that bears on this from the great French mathematician Henri Poincaré in a collection of essays that greatly influenced the young Albert Einstein:

We can not know all facts, and it is necessary to chose those which are worthy of being known.

Choose? Worthy? Surely Poincaré is not going prematurely po-mo on us here?

Not really. The notion embedded in his deliberately provocative turn of phrase is that facts need form, some apparatus that can incorporate a given datum into a richer story — one with a meaning larger than that of a single incident. That apparatus is quantitative.

(BTW — I use the word “quantitative” rather than mathematical, because for a great deal of human experience, the math needed to make sense of what’s going on is not that complicated.  It’s often a matter of counting, sorting, and extracting relationships within the formal limits of what you learn by the end of high school.  I have posted on a couple of such examples from great scientists — Freeman Dyson, for one, and J.B.S. Haldane for another.  There are lots more — perhaps readers could be persuaded to post examples of what they think are elegant, simple insights a bit of math can give us ?)

All of this  into mind while I listened to NPR this morning.

This is the story that got me going — a short (1 minute, 10 seconds) reporter-voiced account of what seemed to the Morning Edition team to be something strange: Even though the Fed is cutting interest rates, mortgage rates went up sharply last week. That ain’t how its supposed to be, according to the reporter, Adam Davidson, because when the Fed lowers its rates, other rates are supposed to drop.

The reason Davidson gave for what he saw as weird is not all wrong: he said that lenders are newly afraid of inflation, and hence want to charge a higher price for money that is going to be paid back over time.

But look at the unexamined assumption: that the Fed can control rates in general. That’s not true.

What’s missing here? An understanding of the real importance of time.

The Fed mostly exerts its influence on interest rates through the shortest of short-term instruments, the overnight federal funds rate — which is just the price banks pay for extremely brief loans required to keep their minimum reserves up to snuff.

But real people borrow money for houses on long time scales, most famously through 30 year mortgages. The enormous difference between the types and uncertainties of risk between those two scales of time serve at least partially to decouple the two rates — see the data to be retrieved here for a survey view of this.

So it is true that fear of inflation could keep push term rates up, whether or not the Fed was playing around with short term rates. But so could lots of other things.

Perhaps that the value of US real estate is unclear in a falling market, and thus lenders demand a risk premium before they lend against such difficult-to-value assets. Perhaps the overall credit worthiness rating of American real estate borrowers has dropped in the aggregate.  Perhaps lenders fear that the secondary market for mortgages is going to get a bit less liquid.  Lots of factors play into long term interest rates that have nothing to do with the reasons the Fed makes its interest rate decisions.

In other words: and the NPR story was either meaningless or misleading. And it failed because the reporter glossed over or did not fully understand what the mortgage rate summarizes as a single number — all the complex calculations of risk and profit that underpin the decision of whether or not to make a loan.

What I would have loved to hear instead of a “this fact is strange” report would be that story: how do interest rates express quantitatively our ideas about the future.  It’s still a good, fully human story:  Those numbers tells us a tale about what we think we know about what’s coming down the pike — and how much in dollars and cents we fear changes in our perception of what we don’t know.

Image: Rembrandt van Rijn, “The Money Changer,” 1627. Source: Wikimedia Commons.