Mish's Global Economic Trend Analysis

Why Do Lenders Foreclose Rather Than Make Principal Modifications?
Largest Title Insurer Demands Lender Indemnity Covering Foreclosure Fraud; Is this Kicking the Can or Part of the Solution?
Keynesian Nonsense Falls Out of Favor in UK - Thank God!
French Strikes Reach 7th Day; Japanese Economy at Standstill; China Hikes Interest Rates; Leaked Docs say 10% of UK Public Sector Workers to be Fired

Why Do Lenders Foreclose Rather Than Make Principal Modifications?

Posted: 20 Oct 2010 06:03 PM PDT

Tom Lawler, founder of Economic & Housing Consulting, and a former director and senior vice president at Fannie Mae, provides Answers to Your Questions on the Foreclosure Crisis.

I pickled that link up from Calculated Risk who highlighted one question. Here is a different question I want to discuss in more depth.

Q: Why does it make more sense for a bank to foreclose rather than writing down the loan to keep people in their homes? I know many folks who can qualify, based upon current income and credit, for loans based upon the homes' current market values. (Most homes are down 50% here from 2004-7.) However, the bank would rather foreclose than renegotiate with the current owner. Many of these folks are current on taxes, HOA, etc. Is it an issue of spite to discourage strategic defaults?

A: This is a loaded question. While many lenders/servicers have not done a great job in dealing effectively with borrowers who are struggling to make mortgage payments, by the same token many borrowers whose home values have plunged and have made no payment for well over a year want the banks to write down their mortgage balance to today's distressed-value levels, so that if home prices later go up, they can reap any future appreciation even if their home value remains below their old mortgage balance.

Banks and lenders, not surprisingly, are not crazy about doing that! Instead, most offered modifications that are intended to reduce a borrower's payment, but not in any meaningful way reduce the borrower's mortgage balance.

So let me state it differently: Suppose you had lent money for someone to buy a home for, say, $300,000 with a – crazy as it sounds – $300,000 mortgage. Property values then fall, and that person just stopped making any payments, and said that he/she wanted you to write down the mortgage balance to, say, $150,000, because that's what the home is worth today.

You counter with an offer to temporarily reduce the borrower's interest rate to, say, 3 percent from 6 percent. But the borrower says, "Fuggedaboutit, I want my mortgage written down to $150,000, so if home prices rise again, I'll make money!" How would you react?

The question says that a bank "would rather foreclose than renegotiate." But what is the right renegotiation?

The Seen and Unseen

Lawler answered the question with two questions, but there is another factor at play that is far more important. I am surprised he did not mention it.

Here's the real deal: If lenders gave loan modifications to everyone who was seriously underwater, it would openly invite everyone who was underwater to stop paying their mortgages.

Thus, while it may appear to make economic sense to work out a principal reduction (the easily seen effect suggests the lender would lose less by working out an arrangement than opting for foreclosure then having to unload it at fire sale prices), it is highly likely to be a losing strategy in the long run because it creates a moral hazard of opening inviting everyone who is underwater to stop paying their mortgages.

It is important for lenders to maintain as many consequences as they can (foreclosure is a serious consequence), or they will encourage everyone who is underwater to stop paying their mortgages. Principal reductions would be a mistake from this point of view.

It is always important to consider the seen and the unseen effects of an action.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Largest Title Insurer Demands Lender Indemnity Covering Foreclosure Fraud; Is this Kicking the Can or Part of the Solution?

Posted: 20 Oct 2010 02:01 PM PDT

In wake of robo-signing and other foreclosure fraud including cases of mortgages being sold more than once, the nation's largest title insurer, Fidelity National Requires Banks to Sign Foreclosure Warranty

Fidelity National Financial Inc., the largest U.S. title insurer by market share, will require lenders to sign a warranty assuring their paperwork is sound before backing sales of foreclosed homes.

An indemnity covering "incompetent or erroneous affidavit testimony or documentation" must be signed for all foreclosure sales closing on or after Nov. 1, the Jacksonville, Florida- based company said in a memorandum to employees today. The agreement was prepared in consultation with the American Land Title Association and mortgage finance companies Fannie Mae and Freddie Mac, Fidelity National said.

Bank of America Corp., the biggest U.S. lender, agreed to a similar contract with Fidelity National on Oct. 8, the same day it extended a freeze on foreclosures to all states amid concern by federal and state officials that lenders are seizing homes without properly reviewing documents. The bank plans to start resubmitting foreclosure affidavits next week. Attorneys general across the country have opened a joint investigation into foreclosures, saying they will seek an immediate halt to any improper practices at mortgage lenders and loan servicers.

Title insurers use their records and public documents to verify a seller is the home's true owner and that the property is free from liens. They collect a one-time premium at the closing of the purchase and pay costs that may arise if someone disputes the new owner's right to the property.

The indemnity agreement requires lenders to protect title insurers at their own expense from "any and all liability, loss, costs, damage and expense of every kind" if errors arise in foreclosure procedures, according to the document.

"This is a standard all lenders should follow," said Kurt Pfotenhauer, chief executive officer of the American Land Title Association, a Washington-based trade group. "The sooner that indemnification agreement is adopted market-wide, the more confidence investors can have in this foreclosure market."

Kicking the Can or Part of the Solution?

Zero Hedge, in Largest US Title Insurer To Demand Indemnity And Foreclosure Warranty From Banks writes ...

"The American Land Title Association, which is nothing but a lap dog for the bankers, of course applauded this development. At this point it is only a question of who can kick the massive mortgage fraud can the farthest down the road, before it all comes crashing down."

I respectfully disagree. Whether American Land Title is anyone's lapdog is irrelevant. The pertinent question is whether or not the arrangement makes any sense.

I suggest it does, and I certainly am not a lapdog for the banking industry.

That Bank of America is willing to indemnify insurers is a sign that it does not believe it will lose much by the indemnifications, and/or that it simply needs to get the issue behind them.

Either way, and most likely some of both, we really do need to clear the backlog of foreclosures.

It is easy to get distracted by the mess and attack every proposal.

The pertinent point is this arrangement helps achieve the badly needed result of reducing the backlog of foreclosures, which in turn is necessary to reduce the massive housing shadow inventory.

Thus, this agreement is very much a part of the solution, not a part of any can-kicking exercise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Keynesian Nonsense Falls Out of Favor in UK - Thank God!

Posted: 20 Oct 2010 12:44 PM PDT

At long last, Keynesian nonsense is recognized for the nonsense that it is. The New York Times reports In Britain, Keynesians Fall Out of Favor

In Britain, George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch. He argued forcefully that Britons, despite stumbling growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle classes because of what he insisted was the overwhelming need to reduce the country's huge budget deficit.

In Ireland, where the economy is suffering through its third consecutive year of economic slump, Keynes is doing no better. Devastated by a historic property crash and banking bust, the Irish government is preparing another round of spending cuts and tax increases.

Combined with what Dublin has already imposed, the cuts could add up to as much as 14 percent of Ireland's gross domestic product, an extraordinary amount for a modern industrial country. Ireland's budget deficit reached 32 percent of total economic output this year.

Indeed, across Europe, where the threat of a double-dip recession remains palpable, what is most surprising is not simply that governments from Germany to Greece are slashing public outlays but that the debate hinges more on how fast to do so rather than whether such substantial cuts are the right thing to do under the current circumstances.

"Everything Keynes established about the primacy of maintaining demand at a steady pace is gone," Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, said mournfully.

Along with other noted liberal economists like Paul Krugman and Joseph Stiglitz, Mr. DeLong has long argued for more stimulus spending in the United States and abroad to lift growth, even if deficits rise temporarily as a consequence.

Brilliant Idiots

Every day I ask myself how allegedly brilliant economists cannot see that continuing down the current path will lead to a situation similar to what happened in Greece.

It is impossible to spend one's way out of a mess when the problem is unsustainable spending.

None of these Keynesian fools ever address the question as to what happens when the stimulus is cut off. None of them can see that Japan has proven in spades that neither Keynesian nor Monetarist solutions did anything for Japan but increase debt.

More government spending cannot possibly work when the problem is too much government spending in the first place.

Finally let's address Brad DeLong's statement "Everything Keynes established about the primacy of maintaining demand at a steady pace is gone."

To that I say Thank God!

The idea that governments or central banks can maintain demand at a steady pace is sheer idiocy. We have the dot-com bubble, the housing bubble, and the debt collapse to prove it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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French Strikes Reach 7th Day; Japanese Economy at Standstill; China Hikes Interest Rates; Leaked Docs say 10% of UK Public Sector Workers to be Fired

Posted: 20 Oct 2010 02:37 AM PDT

Global imbalances in a number of countries are back on the front burner. Here is a roundup of news from France, China, Japan, and the UK.

France hit by new wave of strikes over pension reforms

The BBC reports France hit by new wave of strikes over pension reforms

Almost half a million people have taken to the streets of France in a sixth national day of action against planned pension reforms, officials say. Strikes have hit transport and education, 4,000 petrol stations have run dry and police have clashed with protesters in several cities.

Shops were looted in Lyon and cars were set on fire in a Paris suburb. President Nicolas Sarkozy appealed for calm but insisted he would press ahead with plans to raise the retirement age.

The BBC's Christian Fraser, in Paris, says there is a feeling that the demonstration could turn angry, with a noticeable change in atmosphere since last week.

Strikes Hit Refineries

The BBC reports French strikers intend to keep going for seventh day

The scale of disruption has begun to affect large parts of society, with strikes at France's 12 oil refineries hitting fuel supplies hard. Prime Minister Francois Fillon announced plans to end the shortages by asking oil companies to share their reserves to replenish stocks at petrol stations.

Overnight, police lifted the blockade at three fuel depots in Le Mans, La Rochelle and Donges. However, AFP news agency later reported that strikers had again blocked the depot at Donges.

Officials said 379 secondary schools were either blockaded by pupils or had suffered some disruption, the highest number since the protests began at the start of September. In some areas, schools became a focus for violence. Outside a secondary school in the Paris suburb of Nanterre, youths threw stones at police who responded with tear gas.

For the second day running, cars were overturned and set alight in Lyon. There were also disturbances in Mulhouse and Montbeliard in eastern France.

China Hikes Rates to Curb Asset Bubbles

Bloomberg reports China Could Increase Rates More

The central bank of China yesterday unexpectedly increased borrowing costs for the first time since 2007, lifting the benchmark one-year lending rate to 5.56 percent from 5.31 percent. Policy makers there are trying to curb lending and prevent an asset-price bubble.

"This move is consistent with their broader policies," John Lipsky, the IMF's first deputy managing director, said in an interview in Tokyo today. "I don't believe they look to monetary policy or interest-rate policy alone as a way of moderating growth in inflation pressures. But it's perfectly possible that they'll, if needed, continue to use interest rates as well as other policies."

China's monetary tightening came days ahead of a meeting of Group of 20 finance authorities where the yuan is likely to be discussed. China and other emerging economies have been criticized for keeping their currencies weak to benefit exporters. Emerging economies, for their part, have complained that easy monetary policy in advanced economies is leading to capital pouring into their markets.

One certainly has to wonder if this is a ploy ahead of G-20 meetings. Then again, China is overheating. Regardless, hiking rates will put upward pressure on the Yuan. However, if the global economy falters and Chinese exports with it, China is almost certain to slow appreciation of the Yuan, inflation or not.

Accord Reached?

BNY Mellon says China Rates, Geithner Talk May Signal Accord

China's increase of its lending and deposit rates and U.S. Treasury Secretary Timothy F. Geithner's commitment to a strong dollar may suggest the nations have reached a currency accord, Bank of New York Mellon Corp. said.

"The timing of this week's comments and policy shifts at least allows the possibility that some agreement has been reached," Simon Derrick, chief foreign-exchange strategist in London, said today in an e-mailed note. "If some kind of accord has been reached then this would be hugely significant, signaling trend reversals in a wide range of markets."

I will be amazed if any kind of meaningful, lasting accord of global currency issues is reached. Agreements to agree at some later date are not meaningful.

Rare Earth Embargo Escalates

The New York Times reports China Said to Widen Its Embargo of Minerals

China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of those materials to the United States and Europe, three industry officials said on Tuesday.

"The embargo is expanding" beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.

They said Chinese customs officials imposed the broader restrictions on Monday morning, hours after a top Chinese official summoned international news media Sunday night to denounce United States trade actions.

China mines 95 percent of the world's rare earth elements, which have broad commercial and military applications, and are vital to the manufacture of products as diverse as cellphones, large wind turbines and guided missiles. Any curtailment of Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western companies are believed to keep much smaller stockpiles of rare earths than Japanese companies.

China experts said on Tuesday that Beijing's assertive stance on rare earths might also signal the ascendance of economic nationalists, noting that the Central Committee of the Communist Party convened over the weekend.

Japanese Recovery at Standstill

The BBC reports Japanese economy 'at standstill'

The Japanese economy is at a standstill, Japan's government has said, as concerns about the strong yen continue to grow. The recovery in the economy was "pausing", the Cabinet Office said in a monthly statement.

It is the most negative the government has been about the economy in nearly two years.

Less War Mongering for the UK

Here is some genuinely good news from the UK: Strategic defence review means end of Iraq-scale military interventions

Britain's armed forces will no longer be able to mount the kind of operations conducted in Iraq and Afghanistan, the government's strategic defence review made clear today. For at least a decade it will also be impossible to deploy the kind of carrier taskforce which liberated the Falklands 28 years ago.

Though defence chiefs said today they will still have significant expeditionary forces, they will not be able to intervene on the scale of recent years.

Cherished projects will be delayed, cut or dumped in an attempt to recoup a massive overspend in Britain's defence budget, which faces a black hole of £36bn. In the MoD, 25,000 civilian jobs will go, along with 17,000 from the armed forces. The £38bn annual defence budget will be cut by 8% over the next four years.

The construction, mainly in Scottish shipyards, of two aircraft carriers – the largest ships ever built for the navy – will go ahead even though there will be no planes to fly from them until 2020 at the earliest. That is because the existing fleet of Harriers will be scrapped immediately and an as yet unknown number of US Joint Strike Fighters due to replace them will not be ready for another 10 years.

In an expected and politically convenient move – though sharply attacked by some Conservative backbenchers – the government put off a decision on replacing the existing fleet of four Trident nuclear missile submarines until after the next general election, due in 2015.

The government also decided to Withdraw 20,000 British military personnel from Germany by 2020.

What the hell does the UK have 20,000 troops in Germany for in the first place. It should pull them all out now, not in 2020. Of course the US should do the same, from everywhere. We have troops in 140 countries. The goal should be none.

UK to Fire 10% of Public Sector Workers

Here is more genuinely good news, assuming it is true. The Mail Online reports 500,000 public sector jobs to go

David Cameron and Danny Alexander snapped with secret drafts
1 in 10 public sector jobs to go as government gambles on private recovery
Speculation mounts of deliberate 'leaks' by government ministers

The coalition expects 500,000 public sector jobs to be lost as a result of the drastic spending cuts, it was revealed today.

Danny Alexander let slip the forecast when he was spotted driving into the Treasury with an open copy of the Comprehensive Spending Review on his lap.

The Chief Secretary to the Treasury - who has been nicknamed Beaker after the Muppets character - was reading the document, which was caught on camera by waiting photographers.

While figures in Mr Cameron's documents appeared to show the defence budget was to be cut by 6 per cent, the Prime Minister confirmed to the Commons this afternoon that the department's cuts will be 8 per cent.

The fact that both were photographed on the same day has sparked speculation that the papers were deliberately 'leaked' to soften the blow ahead of the official announcements.

What do you call dismissal of 10% of the public sector workforce?

A start.

We need to do the same thing in the US.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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