Q: What percentage in dollar volume of loans can be modified in a way that benefits both borrower and lender/owner?
David L. Moskowitz: I don’t have a percentage, but I know a lot of this is driven by employment and life claims. With these denominators, there is a higher percentage of win-win loans, as we have learned.
Q: Is it unethical or immoral for a borrower to walk away from an underwater home borrowing loan? There was recently a news section about somewhere in Cleveland where many people, even though they knew they were way under water, said that they really believed in the sanctity of their contract and that they were going to continue to pay and not go in default. Why would this be?
David L. Moskowitz: I saw that piece, it was quite compelling. In fact, 60% of underwater customers have never missed a payment. It is just not something that people want to do. I do not really have the psychology on this. People have seen the housing market go up and down and don’t know how they will behave at a high or low point. In the end, it all comes down to affordability: if you can afford to pay, you will.
Nancy E. Wallace: I mostly look at subprime pools, and even in there people are making very steady payments. The loans are 3-400% over the value, and yet they carry on making periodic payments. And we are talking about by far the majority of people in these pools. The large majority of borrowers are making steady payments on interest rates that are so high they cannot refinance. This speaks to the point of people’s willingness to hang on no matter what.
Paul Leonard: I am continuingly amazed by the phenomenon described here: homeownership as a sociological phenomenon rather than just a financial investment. Homes are where people live, where their kids go to school, etc. There is a sense of morality that comes with making your mortgage payment. On the other hands it surprises me that we haven’t seen more people say that they are subject to a foreclosure proceedings when they cannot make their payments anymore. From the people that are underwater, I have been surprised that there haven’t been more who have decided: this is not a situation that is financially good for me.
Laurence Platt: As a lawyer, I think it is interesting that if a borrower was to do that voluntarily, it is very hard for them to get to that next task. Rental housing is scarce and going up in price. There is a bit of a cost-calculus of what is going to happen next.
James Rhyne: That cost-calculus is driven by a lot of ignorance. The current legal system is not giving them a lot of security.
As a footnote, there is a subdiscipline in economics called behavioral economics, which has discovered a lot of non-rational economic behavior. I strongly recommend a book Daniel Kahneman, Nobel Prize winner in economics, called Thinking, Fast and Slow.
David L. Moskowitz: Don’t underestimate the economic calculus that goes into the impact on your family. People want to preserve the stability of their families. This is why co-ownership is so important. This is why people might continue to pay loans even if they are underwater, just because they can. People will rather opt for that.
Paul Leonard: From what limited evidence exists about strategic default, there have been some studies that the most likely strategic defaulters are people with higher incomes. It is not the average Joe, it is those who are most sophisticated about it. I would suggest that if you are counting on being able to qualify for a loan modification on the basis of defaulting, you would be taking a huge risk that you will not get the modification and loose your house. This is another mitigating factor for this behavior.
Q: Mr. DeMarco announced yesterday that the FHFA is now suggesting it might change its rules to allow principal reduction on mortgages owned or guaranteed by Fannie and Freddie. He also said that it would have a modest effect on households. Comments, thoughts on ways to make it more effective?
Paul Leonard: I don’t think he said that. Those were indeed the headlines. The quantifiable analysis they have done seems to move in the direction of doing it or not doing it. He is defending greater risk levels of default as outweighing potential benefits. He has promised to come to some conclusion by end of month on what they are going to do.
Laurence Platt: The interesting thing is that the analysis they are doing now is based on a Department of Treasury analysis: if we are to do principled reduction, it costs tax payers money. If we get subsidy, it washes out the loss and we as an institution do fine. But this can ruin US tax payers. Either ways the loan is absorbed. The idea that FHFA is making these learned economic calculations by taking money from taxpayers: only in Washington has that happened.
Paul Leonard: Note that this has already been allocated. They are trying to spend money that has already been allocated. There is a larger issue here: we have approved the funding and directed it away from foreclosure regulation. Clearly, without that intervention, some of these institutions wouldn’t be here today. It is important to remember that those resources were legislated for the purposes of cleaning up mortgage junk and foreclosures. In the end, a small portion has been spent on that.
James Rhyne: Two points: Firstly, I would not be surprised if their record keeping is based on technology that is 15-20 years old. Second point: the IT support for these changes is not a problem that is going to be solved overnight, and not for less than some 100s of millions of dollars.
Q: How is the 10billion dollars for principal elections being proportioned? Who gets it?
David L. Moskowitz: That is a complex questions. Think of it as a loan with a 10 billion dollar balance that you are struggling to repay. The settlement works like this: the bank gets a dollar credit for each dollar it forgives. It is not so much marked-to-market on an individual loan basis. There are minimums and maximums for how these forgiveness dollars get allocated in the total pool.