Today’s article in the Business Section of the San Gabriel Valley Tibune should give new hope to home owners in trouble.  In the case of IndyMac the bank is making exceptional efforts to contact homeowners in trouble and offer them a modification on their loans.

The agency says modifying many of those loans – which include lowering interest rates to as little as 3 percent for the initial five-year period – must make economic sense, especially because the agency is soliciting offers from other banks to purchase all or part of IndyMac.

“This is not a social program,” said Michael Krimminger, a senior adviser to FDIC Chairman Sheila Bair. “It’s designed to recover the maximum amount of money.”

. . .

While IndyMac has received responses from about 70 percent of the initial 7,500 letters it sent out in late August, the first group of borrowers contacted by IndyMac may turn out to be low-hanging fruit because the bank first targeted borrowers who already had updated their financial information with the bank.

Others may prove harder to reach. Delinquent borrowers are inundated with collection calls and mail, and often give up hope about holding onto their homes.

“The biggest hurdle is getting people to open these letters to read about the modification offer,” said Evan Wagner, spokesman for the renamed IndyMac Federal BankFSB.

In addition, borrowers need to provide proof of their incomes to participate, and that may be impossible for those who originally exaggerated their income or assets to qualify for a loan.

The IndyMac program is currently designed to help only homeowners on the verge of foreclosure: those who are at least 60 days delinquent on their mortgage.

Wagner, nevertheless, said IndyMac is looking for ways to allow more people to qualify.

This makes good sense to me.  It allows homeowners who have run into difficulties as a result of the economic downturn to get their situation under control.  Hopefully by the time the five years are up people’s financial situations will have improved and they’ll be able to keep their homes for the long term. Other banks are looking to follow suit.

I would strongly urge anyone who is having difficulty to contact their lender to see what can be done.  Be careful, though, and be sure you fully understand the terms and conditions of the deal that is being offered.  Be sure and read everything carefully.  Ask questions.  Remember: if the answers to your questions don’t jive with the paperwork, the paperwork wins.  So make sure that whatever promises are made are reflected in the paperwork BEFORE you sign anything.

Click on the image to see a full size version.

This seems like a good idea to me. It solves the problems of both Main Street and Wall Street with a minimal of government intervention and no taxpayer money.

h/t Tyler Cowen

There is an interesting article in today’s WSJ (subscription only):

http://online.wsj.com/article/SB122350900347317291.html

It describes the housing boom and bust in California. “Home prices rose higher and faster than in most of the US, and started weakening earlier, in 2005.” As home prices fell, defaults rose. Those families saddled with big mortgages started decreasing their other spending to keep from defaulting. Economic growth slowed, and then fell, and the layoffs began, leaving the state with a 7.7% unemployment rate.

If you don’t have a job, you probably can’t make your mortgage payment. So job losses lead to more defaults, and the spiral continues.

All of this is bad news for California, but it the damage would have been contained had it not been for one big factor: Fannie and Freddie.

While California was growing, F&F were decreasing Design Margin, acting as a monopoly but with executive incentives like a competitive business. So rather than wiping out a couple of California banks, the recession there caused the beginning of a cascade that has yet to abate.

The risk was right there in front of the risk managers back in their 2007 off-site. They didn’t need imagination. They didn’t need scenario planning. They didn’t need fancy models.

They just needed to see the gorilla in the room.

h/t Leo Linbeck III

Click on map to enlarge.

The original financial rescue bill that the administration proposed was 3 pages long. The bill that left the Senate last Thursday night was 420 pages. As near as I could tell any failed initiative that had gotten no traction during the last two y years was lumped in to get that vote. God knows how many pages were in the bill the House voted for on Friday, but it was undoubtedly too many. I think that this election cycle my voting slogan shall be: IF THEY’RE IN, THEY’RE OUT.

I posit that once a person gets elected to Congress they are swapped out with body doubles by the nefarious Porkulons.

Biden -”Number two, with regard to bankruptcy now, Gwen, what we should be doing now — and Barack Obama and I support it — we should be allowing bankruptcy courts to be able to re-adjust not just the interest rate you’re paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal that you owe.” -Transcript of Palin, Biden debate – CNN.com

Full details over at Sense of Events.  The money quote:

A better way to destroy the mortgage market than what Biden-Obama propose could not possibly be imagined. For what Joe said (said twice, count ‘em above, twice) is that the government will decide, completely arbitrarily, what the future value of a home will be by adjusting the principal balance to be repaid. Because Joe will never adjust the principal upward, there will be no bottom. Lenders will not be able to predict with assurance whether they will even be able to recover their principal, much less recover their opportunity costs of the loaned money plus enough profit to run the business.

Looks like it’s getting to be time to change careers – again.  Damn it.

There is no doubt but that a whole raft of government entities from both the executive and legislative branches have left their fingerprints on the housing bubble and the credit collapse. Whereas it is important in many respects to pursue studies of who did what in order to correctly remedy the situation and prevent it’s recurrence, there is another side to the story that nobody seems to be talking about.

Some time back Real Estate Commissioners across the country began relaxing the requirements for licensing procedures. It got to be fairly easy to become a licensed Real Estate Sales Person or Mortgage Broker. And when the market got hot everybody and his brother saw that there was money to be made in real estate so they jumped in. Many did so without properly understanding or caring about the responsibilities of the job. Many, a surprising number actually, jumped in without bothering with the niggling formality of passing the real estate exam and getting a license. The result was a whole lot of people who presented themselves as real estate professionals who were incompetent and many were simply unscrupulous. The result was that a public that perforce trusted an agent or mortgage broker to safely guide them through the process wound up taking bad advice. And, in the case of mortgage brokers in particular, advice that was not just bad but positively rapacious.

Not a week goes by but that I don’t run into somebody who got an adjustable mortgage who had been promised a 30 year fixed; who paid double or triple or more the going rate for fees; a higher interest rate than what they actually qualified for and were promised; who had gotten a mortgage on the basis of fraudulent information; who had hidden fees rolled into the loan; who bought a house only to discover some major fault that had been hidden at the time of sale; who had paid for services which were never rendered. On and on it goes. The FBI has begun to go after some of these parasites, but meanwhile people are losing their homes as a result of the illegal actions of these unlicensed, improperly educated, improperly supervised so-called professionals. It’s gotten almost as bad as politics, the reprehensible behavior of 90% of these people make the rest of us look bad.

In the case of mortgage brokers especially, the actions of the unscrupulous tends to debase the integrity of the honest ones. “If you’re not willing to fudge the numbers for me so I can get the loan I want, I’ll take by business over to a guy I heard about who will.” When the choice comes down to fudging the numbers or no food on the family table, standards erode.

It is the job of the Real Estate Commissioner and the Corporations Commissioner to set the standards, oversee and enforce them. This they have failed to do. Despite blatant, egregious, widespread and ongoing abuse they have not done their job. They have become useless watch dogs on the public payroll who can neither bark nor bite. Oddly, I don’t see anybody calling them on it.

The first step is to start cleaning up the mess on the ground, never mind what they do in Washington. Until the States are willing to implement and enforce the regulatory, oversight and accountability powers they already possess it will be business as usual even if Congress manages to pull off a miracle and clean up the cesspool in Washington. I personally feel that the penalties for this kind of illegal behavior are too mild. These blood suckers have been enriching themselves at the expense of the public who have in many cases lost their life savings, their credit, their home, their hope for the future, their good name and their native trust in not only their fellow man but in the social institutions which exist to protect them in the first place. The law need teeth. Big teeth in strong, relentless jaws that will not only leave a mark but draw blood and break bones.

First, the unlicensed real estate and mortgage players need to be taken down and prosecuted to the fullest extent of the law. Same goes for licensed people who defraud their clients to enrich themselves.

Secondly, these people, including licensees, should be required to make restitution to the full extent of their assets. That goes for the Commissioners who failed in their trust. The practice of fining someone $1,000 for failures of ethics that cost their clients hundreds of thousands of dollars is baloney. You got paid $20,000 for setting someone up a crooked deal which led your client to lose their $500,000 home which gets auctioned by the bank for $350,000? You pay back the $20,000 plus the $150,000 plus you get the 1099 for the bank’s loss. You did it 175 times between 2001 and 2007? Add it up. Sorry, bankruptcy’s not an option and there’s no statute of limitations.

Third, there should be a Rapid ReFi available through FHA for people with these rotten loans who have been making their payments for two consecutive years. No appraisal required, the barest minimum of paperwork. Just a simple modification of terms to clean up the loan. In most cases people bought the home in the first place because they liked it and wanted to live there and that hasn’t changed.

Homeowners in trouble who contact the bank on their own initiative to try to work out a modification of terms should be able to do so whether or not they currently qualify for the loan under the new rules. Having spent years giving away loans based on insanely flimsy criteria, the banks have now thrown out the baby with the bathwater and are setting the bar so high that you almost have to prove that you don’t need a loan to buy in order to get one. Charge a little higher mortgage insurance to cover the risk. If a bank refuses a reasonable workout with an existing mortgagor they should not be allowed to dump the loan under the provisions of the rescue package, but must keep it.

Finally, REO asset managers need to thoroughly vet the brokers they are using to sell the inventory they’ve taken back. They are in many cases trusting the same crooked brokers and agents who caused so much of the problem in the first place. Unless they do so they will guarantee that the issue will not be solved, but keep on cascading into the future.

Maybe more on that later.