Subprime loans: a helping hand, Part 1
Every now and then, we need a helping hand across the gap.
Back in the days when I could take three-week vacations from work [Before the internets? -- Ed.], Nancy and I went hiking in Canyon de Chelly (pronounced Shay).
We hiked the Crack Trail
To get our money’s worth from Ronnie, the Navajo guide we hired (these trails are not merely strenuous but also dangerous to the untutored), we picked the toughest, longest trail, then sought out hiking companions, picking two hearty women whose hiking shoes — our proxy for competence — far exceeded ours in tread, lace thickness, and ankle support. Ronnie, shaped like a candy apple on a stick but entirely at home on a ledge over an eight-hundred-foot drop, had no trouble maneuvering her squat frame around even the most perilous corners, but we four amateurs scrambled and grappled as best we can. I am built like a praying mantis and can span gaps like an animate jungle gym, attributes which Nancy was happy to exploit by clambering over me, a service I was happy to offer, but the ladies seemed a bit androphobic — until, that is, we achieved a twisted cambered corner, which by dint of full extension I could span from outstretched left hand to solidly planted right foot, and their rational fear overcome their reluctance to grasp a helping hand across the gap.
In a similar vein, borrowers who took out subprime loans to climb their way into homeownership who have hit difficulties, benefit from a financial helping hand across the gap, and as reported in the Washington Post, one such is now being offered:
Neighborhood Assistance Corporation of America, an 18-year-old housing advocacy group, yesterday announced it would commit $1 billion to refinancing the loans of lower-income people at risk of losing their homes.
Bruce Marks thinks national
Bruce Marks, NACA’s director, is a controversial self-promoting credit hog, and here it takes only one sentence to put my back up.
NACA is in fact doing nothing on its own, rather it is committing other people’s money:
The financing will come from CitiGroup and Bank of America, which have been lending money for years to borrowers screened by the nonprofit group.
Thus NACA in effect seeks to replace the subprime lenders. All that is fine, to be sure, but hardly the heavy lifting.
All borrowers are carefully screened by our state-of-the-art scientists
“If we put people in the front door and they’re being forced out the back door, then we’re not stabilizing neighborhoods, which is part of our mission,” said Bruce Marks, the group’s chief executive.
True enough, and worthwhile regardless of motives.
The announcement comes as lawmakers, lenders and others with a stake in the housing sector scramble to stave off a wave of foreclosures.
Observe the ecosystem’s interdependence. Why do lenders want to avoid foreclosures? Because for them the foreclosure is the beginning of economic pain
Litton Loan Servicing said it too is modifying a record number of loans.
[Larry B. Litton], Litton’s chief executive said his company modifies about a thousand loans a month versus about 200 a year ago. About one in three of those loans ultimately fails, but the tradeoff is worth it, he said.
“If we foreclose, we lose 50 cents on the dollar generally, and the cost to restructure the debt is typically a heck of a lot lower than that,” Litton said. “That’s our motivation.”
What you get back from foreclosure
Foreclosure imposes costs: costs to regain the property, costs to hold it, potential losses on resale, and the administrative burden of ownership during the REO period. As I observed in my post on what to do when you can’t pay your loan, the current owner who provides protective stewardship delivers ongoing sweat equity that often persuades many a lender to stay its hand — particularly when the restructuring workload is rising:
Foreclosures and delinquencies are rising largely because of problems in the subprime segment of the mortgage market, which caters to people with blemished credit records, little money for a down payment or other factors that put them at greater risk of default.
It is always the late-blooming tender flowers that die at the first frost.
In recent weeks, minority advocacy groups, which say their constituencies have been hit hardest by the crisis, have called for a six-month moratorium on foreclosures.
Lawmakers have vowed to take action to ameliorate the housing problems but haven’t offered details.
Details cost money. Vows cost nothing.
And lenders, eager to avoid foreclosures, say they have modified loans for some troubled homeowners, with mixed success.
Don’t throw the baby out with the bathwater
“The great balancing act is to make sure we preserve homeownership opportunities while at the same time not delaying the inevitable,” said Larry B. Litton Jr., chief executive of Litton Loan Servicing.
That’s a critical point I overlooked in my previous post. Lenders who have concluded a loan is unsalvageable tend to put it on the crematorium’s conveyor belt, whereas they refrain so long as there is any hope of recovery.
If you think the loan will never recover
Whether any of these measures will forestall a national housing disaster, with many people being forced out of their homes, has yet to be seen.
Forgive me for being old and cynical about the badinage of ‘disaster.’
But as the 2008 presidential election approaches, the pressure is on to make progress.
The true risk becomes apparent; long before the shakeout is an economic disaster — which it currently is not and may never become — it may seem a political one.
The length of the news cycle
[Continued tomorrow in Part 2.]
