by Tanta on 9/09/2008 10:53:00 AM

People keep sending me this article or bringing up this "fact" in the comments. Because it is such a fine example of a "fact" that isn't actually a fact, but is apparently becoming an article of quasi-religious faith in some quarters, I shall make the attempt to slap it down. I have no particular illusions about how well this will work, but there may be a handful of people who actually care about accuracy and good faith, even (!) when the subject is Freddie Mac. I'm talkin' to you.

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Let me start out with a couple of general observations. This post is about financial accounting matters. If you are one of those people who drove us insane in the comments to yesterday's post on "assets" versus "liabilities" by arguing that "assets" are "really" "liabilities" because you, like Humpty Dumpty, are The Master, then you will find this post unsatisfactory. Tell it to the Marines. The habit of refusing to use standard accounting terms in preference to sloppy "synonyms" is what got these two reporters in trouble in the first place. I'm not going to pander to anyone by doing it myself.

Second, we basically went through a nearly identical version of this brouhaha last November with Fannie Mae. It's deja-vu all over again.

The offending "fact" comes from this article by the world-renowned Gretchen Morgenson and Charles Duhigg, whose willingness to believe anything any unnamed source says about Freddie Mac, whether it makes sense or not, has been documented before on this blog.

Finally, regulators are concerned that the companies may have mischaracterized their financial health by relaxing their accounting policies on losses, according to people familiar with the review. For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of loans have not been marked down in value.

The companies have injected their own capital into pools of securities containing these loans, arguing that their new policies are helping more borrowers. Under conservative accounting methods, changing these policies would not have any impact on the companies' books. However, people briefed on the accounting inquiry said that Freddie Mac may have delayed losses with the change.

What follows is my best effort to discover what the hell these people are talking about. I must disclose to you all that I am really just making an educated guess here. If you possess any expertise at all in financial accounting in general and Freddie Mac's business operations in particular, the foregoing paragraphs do not make any sense whatsoever. (It's like talking to people for whom "asset" "really" means "liability.") So I could be wrong, and they could be talking about some entirely different part of the balance sheet. Anyone with a better guess than mine is hereby invited to share.

My theory is that they are talking about optional repurchases of MBS loans. I cannot think of or find any other part of Freddie's financial statements in which that "two-year rule" or this thing about "injecting capital" would fit. And if they are talking about optional repurchases, they're guilty of terrible reporting. Either their sources are badly informed or they didn't understand what their sources told them or both.

To review the basics of what Freddie does: they buy mortgage loans on the secondary market. These purchases of loans result in two different "portfolios" of loans: the "retained portfolio" and the "guarantee portfolio." The retained portfolio consists of loans and MBS that are owned outright by Freddie. That means Freddie's capital is invested in these loans. Freddie gets the capital to invest in the retained portfolio in large part by issuing notes and bonds--what everyone calls "agency debt." The retained portfolio constitutes an "asset" on Freddie Mac's books (net of the loss reserves), and the debt-funding constitutes a "liability" thereon.

The "guarantee portfolio" consists of various MBS that Freddie guarantees the credit risk of, but does not invest the capital in. The capital to fund these securities is provided by investors who buy MBS. Therefore, the total principal amount of the guarantee portfolio is not an asset on Freddie's books (it is an asset on the MBS investors' books). What shows up on Freddie's balance sheet is the "guarantee asset," which is the fair value of the guarantee fees received, and the "guarantee obligation" (over on the liability side) which reflects the fair value of the projected credit losses.

This distinction between retained and guaranteed portfolios is one reason why Freddie's (and Fannie's) financial statements are complex; each part of the "total portfolio" has different accounting treatment. If you read through these financial statements or any reports having to do with portfolio balances or loan purchase volume, you simply need to pay attention to when a number is given for the "total portfolio" versus one or the other parts thereof. To answer a question that may arise at this point, as of June 30 the principal balance of Freddie's retained portfolio was $792 billion and the guarantee portfolio balance was $1.410 trillion, making a total portfolio of $2.202 trillion (see Table 49 of the 10-K).

So. How do loans get into the retained portfolio? They are either originally purchased as portfolio investments or, in some cases, they were originally purchased in the guarantor program but had to be repurchased out of the MBS. As I said, the current flap seems to be about repurchases of MBS loans. I am going to quote here from Freddie Mac's 10-K. It will help you to know that "PC" means "Participation Certificate," and is just Freddie-speak for "MBS."

We also have the right to purchase mortgages that back our PCs and Structured Securities from the underlying loan pools when they are significantly past due. This right to repurchase collateral is known as our repurchase option. Through November 2007, our general practice was to purchase the mortgage loans out of PCs after the loans became 120 days delinquent. Effective December 2007, we no longer automatically purchase loans from PC pools once they become 120 days delinquent, but rather, we purchase loans from PCs when the loans have been 120 days delinquent and (a) the loans are modified, (b) foreclosure sales occur, (c) the loans have been delinquent for 24 months or (d) the
cost of guarantee payments to PC holders, including advances of interest at the PC coupon, exceeds the expected cost of holding the nonperforming mortgage in our retained portfolio. Consequently, we purchased fewer impaired loans under our repurchase option for the three and six months ended June 30, 2008 as compared to the three and six months ended June 30, 2007. We record at fair value loans that we purchase in connection with our performance under our financial guarantees and record losses on loans purchased on our consolidated statements of income in order to reduce our net investment in acquired loans to their fair value.

Remember that the "guarantee" on the MBS means that Freddie Mac is responsible for passing through interest payments to bondholders as long as those bondholders have principal invested, whether the borrowers make payments or not. The way this usually works is that for the first 90 days of delinquency (120 days since last payment), the servicer is obligated to advance scheduled interest and principal to Freddie Mac, who passes it through to the bondholders. The servicer makes efforts to collect the past-due payments from the borrowers. Generally at around 90-120 days, if the loan is still delinquent, the servicer's obligation to advance payments stops and Freddie Mac is the one obligated to advance payments to the bondholders. The basic contractual terms of the MBS are that Freddie has the right, but not the obligation, to buy a seriously delinquent loan out of the pool at this point. The repurchase price would always be par, since the bondholder must receive 100% of principal invested per the terms of the guarantee. Obviously, a seriously delinquent loan is likely to have a fair value of much less than par, but Freddie has to take that loss, not the MBS investor.

However, that is an option, not an obligation. Alternatively, Freddie can allow a seriously delinquent loan to remain in the MBS, while continuing to advance payments to the bondholders, until foreclosure or modification, for up to two years. To my knowledge the two-year limitation has always been part of the MBS rules--it's just the outside limit on how long Freddie (same for Fannie) can keep advancing on delinquent MBS loans before they have to give up and repurchase them. There have never been many loans that are seriously delinquent for two years without ever getting to foreclosure or workout, but in the strange cases (probate, bizarre title problems) it can happen. In no sense is this "two year rule" about letting loans just stay delinquent with no action by the servicer or Freddie Mac, or no effect on the fair value of the guarantee obligation, for two years. It absolutely does not mean that no credit losses are taken until a loan is "two years late." The two years refers to how long a delinquent loan can stay in the MBS, not how many months past-due it can be before it is impaired.

Why would Freddie elect to repurchase a loan when it doesn't have to? Well, if the cost of capital is cheap, but the interest payments you have to advance to the bondholders are not, it generally makes sense to repurchase the loan. The loan balance then comes out of the "guaranteed portfolio" and into the "retained portfolio." The write-down of the asset occurs immediately, given that the purchase price of the loan was par (100% of unpaid principal balance) but the fair value of a seriously delinquent loan is less than par. So a loss is immediately recognized by the retained portfolio. On the other side of the books, the guarantee asset and obligation are adjusted to reflect the fact that this loan is no longer earning a guarantee fee or reflecting guarantee costs. Any final loss taken on the loan in foreclosure is taken on the retained portfolio side, not the guarantee side.

On the other hand, if the cost of capital--Freddie's borrowing cost, including capital reserve requirements--is expensive, but the interest payments to be advanced to bondholders are relatively cheap, then you leave the loans in the MBS unless and until you are obligated to buy them out, which would be when they are delinquent and they are modified, foreclosed, or hit that two-year limit. If the loans stay in the MBS, they rack up those costs that go into the guarantee obligation, but they do not result in a recognized loss to the retained portfolio because they are not in the retained portfolio.

Now, go back and reread the Morgenson/Duhigg version of this and see if it strikes you as a reasonable paraphrase. As you do this, ask yourself if you've read anything lately in the news about Freddie needing to increase its capital reserves and facing much higher borrowing costs than it had previously. Then ask yourself if this all might be about not "injecting capital" into "pools of securities."

Of course this election not to buy out every seriously delinquent MBS loan means that fewer losses have to be recognized in the retained portfolio. The whole damned idea is to keep these loans in the guaranteed portfolio instead of the retained portfolio. However, it certainly doesn't keep Freddie from having to pay interest to bondholders every month, whether paid by the borrower or not. It still has a major effect on credit losses. It simply keeps the loans' principal balance "financed" by MBS bondholders instead of by Freddie Mac.

Has that been a wise move by Freddie? Well, I don't know we could answer that question in Morgenson/Duhigg terms, since they seem to think that the only "losses" that can be taken are in the retained portfolio. You would have to analyze the effect of the interest advances to the guarantee side of the books to see if this was a smart move or not. But of course Morgenson and Duhigg have no intention of doing that--I suspect they fail to grasp how one might do that--because to do so interferes with the narrative of "cooking the books" that they're peddling.

The interesting question that will arise, of course, is what will happen to this repurchase policy post-conservatorship. Will the government order Freddie to start buying out every delinquent MBS loan at 90 days down--knowing that the government might have to provide the capital for them to do that--in order to book retained portfolio losses "promptly," or will it perhaps decide to let the bondholders continue to finance these loans, just as Freddie has done? I'm really looking forward to finding out, myself.

At any rate, if one more person starts bringing up this canard about "no losses until the loan is two years past due" in the comments, those of us who are actually paying attention are going to jump your case for--wittingly or not--spreading stupid. You gotta stop believing everything you read in the paper.

I am the kind of person who wants to read a long post about financial accounting issues.

by Tanta on 8/22/2008 01:05:00 PM

Long-time readers will remember the MMI, or Muddled Metaphor Index, which was basically a long-running gag at the media's expense. Now I've been provoked again, and so I introduce the MTI, or Mortgage Telephone Index. I'm sort of hoping this will be the only entrant into the series, but you never know. The MTI features reporters and editors who apparently spend all their day on bad cell phone connections and do not actually read much about mortgages. This produces an effect like the old game of "Telephone," with equally hilarious results.

Today's Washington Post brings us "Bad Begets Worse," which is actually the title of this article and did I not make that up.

Freddie Mac, for instance, no longer finances no-money-down mortgages, nor does it continue to buy or guarantee mortgages given to people who have failed to document their finances. Fannie Mae has withdrawn from the market for all-day loans, which are considered risky because they require less documentation than traditional prime loans.

No, Fannie Mae has not suddenly decided that mortgage loans need to have terms of more than 24 hours to be eligible for purchase. It appears that someone said "Alt-A" and someone else heard "all-day."

Presumably we will be able to tell if we have any readers at the Washington Post by how long it takes for that to go away . . . .

(Hat tip, Michael!)

by Tanta on 8/15/2008 11:39:00 AM

I'm beginning to think this kind of thing could be a regular feature: gullible (or just lazy) reporter writes some article on some housing-bust related topic which ends up being mostly free publicity for some hustler, who is treated reverently as an "expert." Earlier examples of the genre are here and here.

Today's embarrassment comes via reader Alan, who sent me this link to the San Francisco Chronicle:

Homeowners are flooding City Hall with so many requests to reduce their property values that the tax assessor said Wednesday his office may not be able to meet the demands.

So far, Assessor-Recorder Phil Ting's office has received about 1,000 requests for informal re-evaluations - three times the number filed last year. Friday is the deadline to request an informal property re-evaluation from the assessor.

"I'm worried that because we have such a huge influx we'll not be able to get back to everyone," Ting said. So far, San Francisco assessors have responded to informal requests from 285 property owners.

After having noted that the assessor's office is so deluged with requests it probably won't get to any more of them--and after noting that many people won't get a reduction because while home prices are dropping, they are still higher than the assessed values--we get to the obligatory "expert":

Due to the growing number of these requests, some people have started businesses to help property owners appeal for a lower valuation.

Joshua Carnes, vice president of operations for the Sacramento-based Prop8.org, said anyone who bought a home in the past few years should expect the assessed value of the property to decrease. The company is named after Proposition 8, the 1978 voter initiative that allowed home values to be reduced when there is a dip in market values.

"If you're a homeowner in California, you lost value on your property this year," Carnes said. "Unless you don't mind overpaying property taxes, there is no reason you should not file for a reduction."

My, but that dot-org name seems to imply that this is some kind of nonprofit organization, doesn't it?

Not hardly. Prop8.org is a for-profit little firm that wants to charge you to handle your re-evaluation requests for you. And you must not, under any circumstances, miss the picture of Joshua Carnes on this page (is that a zoot suit? A wedding tux? Do you Californians actually dress like that to leave the house on a normal day? Just askin'.) Nor do you want to miss the officer bios. Nor do you want to fail to ask yourself why a reporter thought a buncha guys who also run outfits called "Cashout Options" and "Equity Flips" and "Bailout Help" are really just kind of objective consumer advocates who have no self-interest in knowing what your property might currently appraise for.

Reporters and editors: I'm going to keep this up until it stops. So I really suggest you make it stop. If you don't bother to evaluate your sources before you publish, I will do it after you publish.

*Old farts who need help with "pwn3d" go here.

by Tanta on 8/11/2008 10:27:00 AM

A few days ago we encountered the Pestanas, who are suing WaMu for failing to modify their loan. In that case, the Pestanas allege that WaMu told them they couldn't be considered for a modification because they had only missed one mortgage payment, so they tried again after having missed several payments, only to find WaMu initiating foreclosure.

Today we encounter the Harrises. In this case, the Harrises allege that Countrywide told them they couldn't be considered for a modification because they were never delinquent. Rather than going ahead and becoming delinquent, like the Pestanas, the Harrises called the Chicago Tribune to find out how they could join the Illinois Attorney General's fraud suit against Countrywide. It appears that it will not be necessary for the Harrises to allege in court that Countrywide defrauded them, since after the reporter called Countrywide, the borrowers were offered a rate reduction modification.

I wish to observe that I am of two minds about this phenomenon. On the one hand, this is the power of the press that we should all be in favor of: its ability to side with the little guy, threaten the big corporate interests with exposure and bad publicity, and get things done for the little guy. Afflict the comfortable, comfort the afflicted, mission accomplished.

On the other hand, any motivation that at least some little guys might have had to tell a complete and unvarnished story to a reporter has a tendency to disappear when the reporter is being used by the little guy as a negotiator with the big bad corporation. We all know the rules by now: the servicers cannot tell their side of the story, because of confidentiality rules that limit them to the ubiquitous "we cannot comment on the facts of this borrower's case." The borrowers, on the other hand, are free to tell as self-serving a story as they want to the reporter, sans rebuttal by the servicer. Unless the reporter displays a pretty good degree of skepticism and curiosity, the reporter (and hence the rest of us) is likely to get spun.

Here's the saga of the Harrises, per the Tribune. I know I have my unanswered questions about this. Does anyone else have a few?

The root of the Harrises' dilemma goes back to 2004, when they decided to refinance the home they bought in 1994.

Lisa Harris and her husband were entrepreneurs who had recently bought an Evanston laundromat and a Park Ridge tanning salon. They didn't have two years of regular income to report, but their credit score was a high 720, so they qualified for a low-documentation, 30-year adjustable-rate loan. The interest rate was 7.95 percent for the first three years.

The rate would then adjust every six months and could go as high as 14.95 percent. The Harrises borrowed $193,500, making their monthly payment roughly $1,800.

But the Harrises' businesses closed and Lonny went to work selling cars; he brought home only $30,000 in 2006 and $60,000 in 2007, not enough to allow them to refinance with another lender. Lisa Harris, 39, has a small business in her home that brings in about $500 a month. Their 6-year-old has special needs, making it difficult for her to work outside the home.

Their interest rate jumped in June 2007 and again in January 2008, reaching almost 11 percent. Lisa Harris called mortgage lender Countrywide's "home retention" department in January and asked to have the interest rate reduced and fixed.

She wrote a hardship statement. She faxed bank statements showing cash deposits from her in-laws. She filled out a detailed budget. After getting no answer for months, the Harrises were informed that they didn't qualify for the program because they aren't delinquent on their loan.

It may or may not have made much sense for Countrywide to decline this mod request; I couldn't say because there's too much missing information, like how much misrepresentation the Harrises originally made on their original loan application. But I confess I am curious about what grounds the Harrises thought they had to sue Countrywide for "fraud."

I suspect the reporter doesn't explain that because . . . she got spun.

(Thanks, Gene!)

by Tanta on 8/05/2008 01:45:00 PM

And I give Freddie extra points for not writing the kind of puling corporate-robot-speak PR most companies do in this situation. This is what we call "frank":

Charles Duhigg's story ("At Freddie Mac, Chief Discarded Warning Signs," August 5) fell far short of the standards New York Times readers have every right to expect from the paper. Given the consequence of the subject, readers deserved more than a superficial tale spun on the purported comments of a collection of anonymous former employees and unspecified "others" – likely including the well-worn band of ideologues and self-interested detractors who have opposed the GSE model for years.

Readers deserve more. The story is apparently based on the word of David Andrukonis, a former employee who was involuntarily terminated in 2005. It describes a memorandum – one we can't confirm the existence of, one we don't believe Mr. Syron ever saw, and one that Mr. Duhigg never produced for us. Although the reporter was aware of these facts, he cited the individual's account without mentioning them, instead portraying the former employee as having left amicably to become a schoolteacher.

Readers also deserve more than a highly selective cherry-picking of quotes from extensive interviews and information the reporter received over several hours and weeks, including interviews with Mr. Syron. . . .

There is much more.

(Hat tip to bacon dreamz, Lord of the Commenters Who Never Gets Enough Credit)

by Tanta on 8/05/2008 08:23:00 AM

This has to be read to be believed.

More than two dozen current and former high-ranking executives at Freddie Mac, analysts, shareholders and regulators said in interviews that Mr. Syron had ignored recommendations that could have helped avoid the current crisis.

Many of those interviewed were given anonymity for fear of damaging their careers by speaking publicly.

Actually, all but two of the "more than two dozen" were given anonymity to damage Richard Syron's career while protecting their own, by my reading of this. One former Freddie Mac executive and one industry consultant are named. Nobody else is. And we are given no idea how many of the "more than two dozen" are shareholders. (Who need to protect their careers?) Or how many of them were found on Yahoo! message boards. (Hey! We don't know that they weren't!)

The Times reporter, Charles Duhigg, can't even bring himself to include Syron's full bio:

Mr. Syron joined Freddie Mac as chief executive and chairman in 2003, after the company revealed it had manipulated earnings by almost $5 billion. He came to Freddie Mac after serving as chairman of the Thermo Electron Corporation, a scientific instruments firm, and of the American Stock Exchange. An economist with a Ph.D. and the first in his family to graduate from high school, Mr. Syron was welcomed as an unpretentious but politically astute leader.

I have to wonder why the Times leaves off the part about how Syron is a former deputy assistant Treasury Secretary, asssistant to Federal Reserve chairman Paul Volker, and president of the Federal Reserve Bank of Boston in the late 80s and 90s, which included being a member of the Open Market Committee. None of that makes him perfect or infallible or anything else, of course. But why does the Times leave it out? If Syron is as clueless as the Times wants us to believe, isn't it relevant that Syron had a very influential role in restructuring failed banks and the FSLIC during the last major banking crisis? I remember all that being quite relevant when Freddie hired him in 2003 after the accounting scandal.

No, but a former employee wrote a memo in 2004 that apparently didn't impress Syron all that much. A lot of us wrote memos in 2004 that didn't impress a lot of people all that much. I can relate to the urge to say "I tolja so." I'm not sure I can relate to the claim that if this one memo had been taken seriously, all this "crisis" could have been averted.

But the Times story just isn't interested in plausibility:

By the time both men [Syron and Fannie Mae's Mudd] took over, the firms had perfected the art of making money by capitalizing on the perception they were implicitly backed by the government. That belief allowed Fannie and Freddie to borrow at relatively low rates and use those funds to buy mortgages as investments. The companies also collected fees in exchange for guaranteeing that borrowers would repay other home loans.

By the end of 2007, the firms held mortgages worth more than $1.4 trillion combined, and guaranteed payments on loans worth $3.5 trillion more.

Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.

"By the time both men took over." As far as I know the market has believed in the implicit guarantee of the GSEs since the day the GSEs were chartered. To say they "made money by capitalizing" on that fact is to say they operated as GSEs--government/private hybrids--since they were chartered as GSEs.

Also, what's with this exposure to the "unlikely, but potentially catastrophic possibility" of home price declines? What are we saying here? The article seems to want us to believe that all the probabilities had in fact been laid out for Syron (by his trusty memo-writer) and he ignored them. But it was also "unlikely"?

I suggest that the Times reporter and his anonymous sources (whose self-interest, of course, we cannot measure) are in a bind here: as they all, including the Times, spent so many years denying the reality of the housing bubble, they have to stick to the hoocoodanode line. But the currently popular narrative is about the GSEs being front and center of goofball lending--as hard to swallow as most of that is--so we have to shade this into "the GSEs coodanode, but not the rest of us."

There will be analysts, shareholders, industry experts, and professionals in financial services and housing--not to mention a couple of economists--who will, anonymously, comment on this blog that this reporter is a clueless hit-man. Starting with me. I wonder if that will make it true for the NYT.

by Tanta on 7/25/2008 11:50:00 AM

This is an extremely distressing story: a woman faxes a suicide note to her mortgage servicer on the day the foreclosure sale is scheduled, and is dead by the time the police arrive.

Distressing for anyone with what I take to be a normal sense of human decency, that is. To the local and now national media, it seems to be catnip. Carlene Balderrama's personal tragedy is in danger of becoming an indelible urban legend of the Great Predatory Foreclosure Crisis, uncomfortable facts be damned. The tenor of the reporting, of course, makes anyone who expresses any skepticism about the media's line on this sad event sound inhuman. I have been telling myself since I first saw this story that only a fool would try to steer a course through the rock of credulousness or the hard place of callousness. But I guess it's my job to be a fool today.

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The Boston Globe got the thing underway on Thursday:

TAUNTON - The housing crunch has caused anguish and anxiety for millions of Americans. For Carlene Balderrama, a 53-year-old wife and mother, the pressure was apparently too much.

Police say that Balderrama fatally shot herself Tuesday afternoon, 90 minutes before her foreclosed home was scheduled to be sold at auction. Chief Raymond O'Berg said that Balderrama faxed a letter to her mortgage company at 2:30 p.m., saying that "by the time they foreclosed on the house today she'd be dead."

The mortgage company notified police, who found her body at 3:30 p.m. The auction had been scheduled to start at 5 p.m., when bidders showed up at the house and found it surrounded by police cruisers.

But, unbeknownst to buyers and to Balderrama, the auction had been postponed by the time she grabbed her husband's high-powered rifle, O'Berg said.

Balderrama left a note for her family, saying they should "take the [life] insurance money and pay for the house," O'Berg said. The chief said he did not know, however, if the family would be able to collect on the policy in the event of a suicide.

Those appear to be facts. Then we get this:

Joe Whitney, who works with Balderrama's husband, said that she handled the bills in the household and that the husband was unaware of the foreclosure.

"John didn't even know about it; that's the surprise," Whitney said outside the home, where he had come to comfort the family. "It's just one of those awful, awful, tragic events."

John Balderrama did, however, file for Chapter 13 bankruptcy three times from 2004 to 2006, but the courts dismissed the petitions. Debtors who declare bankruptcy under Chapter 13 generally can keep their homes while paying off their debts under a court-approved reorganization plan.

Something doesn't add up here. Nonetheless, the reporter is undeterred:

As Congress rushed yesterday to help 400,000 strapped homeowners avoid foreclosure and prevent Fannie Mae and Freddie Mac from collapsing, the suicide underscored the potentially devastating toll of the housing crunch.

Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, said it is not uncommon for homeowners to contemplate suicide when they cannot keep up their mortgage payments. Marks's group counsels homeowners in crisis and responds to such crises by immediately notifying the police, he said.

"What gets us so angry is that people blame themselves," Marks said. "They can't see past their sense of responsibility to see the responsibility and the predatory nature of these lenders. The fact of the matter is, unless something dramatic happens, there's going to be more and more people like her taking their lives."

Police believe that when the Balderramas bought the house in a stronger market, the family chose an adjustable rate mortgage, confident they would be able to keep up the payments. But as the housing market plummeted and the rates rose, the family fell behind, O'Berg said.

We have Bruce Marks, who should be ashamed of himself, labelling Balderrama's mortgage lender a predator. We have a cop making claims about the terms of the mortgage loan and the sequence of events leading to the default--claims that the reporter could have verified by searching the public records. (Note: I have not examined the Balderrama's recorded mortgage documents, because the North Bristol MA Registry of Deeds requires creation of an account with an account fee and a $1.00 per page charge for the documents. I am not inclined to spend $15 to see a copy of their mortgage, but I'm inclined to wonder why the Boston Globe isn't so inclined.) But we get even more from the co-worker and the cop:

Whitney said he did not believe that Carlene Balderrama had a history of mental illness.

"It looked like a happy couple," Whitney said. "That's why John was so blown away. Nothing medically ever came up, and I've known them for 20 years."

O'Berg said he was troubled that the pressures of foreclosure had triggered suicide on a street that he described as solidly middle-class.

"That's the real sad part: This is a middle-class family, a husband working, the son is working," O'Berg said. But the housing crunch, he said, "is inflicting real pain on middle-class Americans.

"Put yourself in her shoes," he added. "You handle the finances, and you're hiding everything from family. It's a lot of pressure."

Why are two people who are neither psychologists nor economists so eager to convince us that the primary cause of this suicide was "the foreclosure crisis"? Since when do the local cops become your go-to sociologists?

The Boston Herald on the same day provided some facts that rather confound this narrative:

John Balderrama bought the three-bedroom house at 103 Duffy Drive in October 2002, using a $220,255 mortgage to cover most of the $232,000 purchase price, public records show.

But less than eight months later, PHH initiated foreclosure proceedings - usually a sign that a borrower is at least 90 days delinquent.

The Herald does not confirm that the mortgage loan in question was an ARM, but it certainly casts doubt on the idea that rising interest rates and plummeting house prices had anything to do with the Balderramas' difficulties with their mortgage.

According to the Herald, John Balderrama filed Chapter 13 bankruptcy petitions in 2004, 2005, and 2006. I did spend some time looking at these bankruptcy filings, which are available to anyone with a PACER account and the willingness to spend 8 cents a page. In all three filings, the only debts listed for Balderrama were a single mortgage on the house and a car loan. There are no unsecured debts and no undischargeable or "priority" debts. There are no catastrophic (or even modest) medical expenses or debts. In fact, in all three filings, the only debt to be paid through the Chapter 13 plan is the arrearage on the mortgage, which seems to have been around $27,000 in the first filing and around $44,000 by the last one (in April 2006). Otherwise, each plan indicated that Balderrama would pay his approximately $1700 house payment (that figure includes taxes and insurance) and $289 car loan directly to the creditors during the BK. Each plan indicated that there were no assets above exempt amounts.

The only real difference among the three filings is that Balderrama's income kept increasing substantially, meaning that in each filing the required payment to the trustee kept increasing. In the first filing, he claimed gross monthly income of $6,202, which resulted in a monthly repayment plan requirement of $527 (in addition to the regular monthly car and house payment). (The Herald story reports his net (after tax) income instead of gross.) By the third filing, the gross monthly income was $10,461 and the plan payment was $1066. As far as I can tell, Balderrama never made more than one plan payment during any of these BKs. It's hard to tell whether the mortgage payment was made post-petition, but in at least two of the BKs the post-petition car payment didn't get made. All the bankruptcies were dismissed due to either failure to make payments to the trustee or failure to attend hearings or creditors' meetings.

I have to say that these were a very strange set of BK filings. Carlene Balderrama never appears as a debtor, or even as a spousal signatory. (Did Carlene even know about the BK filings? It makes more sense that she would be in the dark about the BKs than that her husband was in the dark about the mortgage arrearage.) Although the household income keeps rising, there are no increases in bank accounts or other debts or assets that can account for where the money goes every month. In the first BK, filed just over a year and half after the purchase of the home and a year after the first foreclosure attempt, Balderrama's debt-to-income ratio as a mortgage lender would calculate it was 41%, including the Chapter 13 payment. By the last BK, the DTI was 29%. There is no indication that Balderrama's mortgage payment increased; in fact if the debtor's filing is correct it decreased (from $1740 in the first filing to $1703 in the last).

It seems quite obvious that these filings were intended solely to stay foreclosure rather than to deal with crippling debt payments and reduced income. Yet Balderrama never cooperated with the court or made an effort to make payments, resulting in serial dismissals. Even on the assumption that the household budget in a Chapter 13 is often unrealistically tight, I just can't see from the paperwork why the Balderramas couldn't pay their house and car payment and the arrearage installments.

Are these folks debt-bingers? Apparently not. They've had exactly two debts in the last six years: a house payment and a car payment. Did they buy an overpriced home with a mortgage that instantly went upside down? It doesn't look like it. If Zillow is to be believed, the mortgage has never been upside down and was probably quite close to break-even when the foreclosure was completed (including arrearages in the loan amount). Victims of job loss or serious illness? Doesn't look like it. Victims of a predatory lender squeezing them with an exploding ARM in a falling RE market? The BK paperwork suggests that that claim is ridiculous.

Nonetheless, by this morning ABC news got ahold of the story. A new detail:

But for one reason or another, it appeared that Carlene Balderrama decided to deal with the family's flagging finances on her own. O'Berg [our ubiquitous cop quote-bot] said that according to Balderrama's husband, John, Carlene handled all of the family's financial matters.

"I had no clue," John Balderrama told The Associated Press on Wednesday, adding that Carlene had hidden from him the fact that she hadn't paid the mortgage in 42 months.

Mr. Balderrama filed two bankruptcies during the last 42 months. But he had no idea his mortgage payments were in arrears? Are we supposed to believe that Carlene Balderrama forged her husband's signature on the BK filings and suborned the perjury of at least one attorney? How else do we square this claim of ignorance with the BK records?

Little details like that, however, don't stop the ABC reporter or his psychologist quote-bots:

"Suicide is certainly a response to hard economic times," noted Dr. Harold Koenig, professor of psychiatry and behavioral sciences at Duke University Medical Center in Durham, N.C. "Consider what happened when the stock market fell in 1929. There was a rash of suicides."

Well, John Kenneth Galbraith labelled that "rash of suicides" a "myth" in 1955, and if anyone has more recent hard data that says otherwise, I'd like to see it. Before we construct another myth about the Great RE Crash of 2008 with the same kind of "data."

I do not doubt for a moment that Carlene Balderrama was under severe psychological stress. Whatever kept her going through six years of an inability to make her mortgage payments, clearly the reality of the day of foreclosure sale was too much to bear. What I do object to is the transformation of this story into an urban legend about "predatory lenders" and the effects of an RE downturn based on no evidence whatsoever. I object to these reporters' unwillingness to deal with the facts available to them that surely complicate this currently popular narrative. I object to cops running off at the mouth with unsubstantiated claims and a husband and his co-worker heaping blame for the family's financial woes on a dead woman who can no longer defend herself, and I surely object to it when it gets used to slander a mortgage servicer who was, apparently, the only party involved who ever took this woman seriously enough to call 911.

If anybody can explain to me how this series of reports on Carlene Balderrama's suicide are anything other than exploitation of her tragedy in order to support an overwrought rhetoric that sees every foreclosure that has occurred in the last year or so as "predatory" and "unnecessary," then please do so in the comments. I am not seeing it.

Read more wretchedness.

by Tanta on 7/22/2008 09:26:00 AM

Yes, boys and girls, I wish to say something complimentary about a media outlet. The WSJ, no less. Dog bites man.

Housing Wire directed my attention to this very interesting article about the FDIC and the crappy, fraudulent, and occasionally predatory loans it allowed Sterling Superior Bank [Duh! --ed.] to continue to originate and sell on the secondary market even after the FDIC took control of the institution and had FDIC staff at the bank supposedly providing grown-up supervision. It's an important story.

But look! On the online version of the story, there's this little box several paragraphs down, titled "From the Case Filings." And it in are links to the various court filings and internal FDIC documents on which the story is based. You can click on one of those links, if you feel the urge, and read the same primary written sources that the reporter used to write the story! If all you want is the short version, you can just read the article. But for once, we see the online media using the powers granted by the Internet to create a situation in which we're not forced to settle for just the short, breathless, over-simplified version! Not that I think this particular article is an offender in that regard. But I have spent a lot of blogging time on breathless, over-simplified articles--Hi, Gretchen!--based on great long complicated court filings that I had to go look up myself to get a clearer picture, if they were even available online.

I therefore drop a deep and graceful curtsy to the WSJ's online editor and the reporter, Mark Maremont. You probably don't want to get used to this yet, but it is still quite sincere.

by Tanta on 7/22/2008 09:07:00 AM

UPDATE: Please see the end of the post for a marvelous blast from the Brooks past.

I have never actually gone out of my way to read a David Brooks column; this one was directed to my attention by a reader (thanks, Pat!).

It takes on the same Morgenson article I went after on Sunday. In the process of doing so it makes a series of claims that are, I think, way more preposterous than Morgenson's tendency to see borrowers as primarily hapless, passive victims of predatory lenders:

[W]hat happened to McLeod, and the nation’s financial system, is part of a larger social story. America once had a culture of thrift. But over the past decades, that unspoken code has been silently eroded.

This nostalgia for the lost "culture of thrift" always gets on my nerves. America has always had both a "culture of thrift" and a "culture of conspicuous consumption." We have had our Gilded Ages before the year 1992. The "BankAmericard" (which became the Visa) was invented back in the "thrifty fifties," about ten years after economist James Duesenberry first popularized the phrase "keeping up with the Joneses." Collapsing the history of America into a lost golden age of thrift contrasted to a degenerate present of consumption excess is a reliable sign you're in the presence of ideology. Like this:

Some of the toxins were economic. Rising house prices gave people the impression that they could take on more risk. Some were cultural. We entered a period of mass luxury, in which people down the income scale expect to own designer goods. Some were moral. Schools and other institutions used to talk the language of sin and temptation to alert people to the seductions that could ruin their lives. They no longer do.

Norms changed and people began making jokes to make illicit things seem normal. Instead of condemning hyper-consumerism, they made quips about “retail therapy,” or repeated the line that Morgenson noted in her article: When the going gets tough, the tough go shopping.

McLeod and the lenders were not only shaped by deteriorating norms, they helped degrade them.

Reactionaries and moral scolds have been carping about working people aspiring to "mass luxury" since at least the time of Adam Smith. Anyone who has ever read a nineteenth century novel has encountered the ubiquitous scenes of upper-class women bemoaning the increasing availability of inexpensive machine-made ready-to-wear clothing, which--horrors!--allowed the servant class to wear dresses and suits that were increasingly hard to distinguish from the clothing of their middle-class betters. Or the apocalyptic brooding over the sudden availability of affordable washing machines and gas ranges, which would lead to nothing but demands for female suffrage and public schools for the servant class. (Yep. They were right about that.)

And just when did the schools used to talk about the "sin and temptation" of shopping, and just when did they stop? Diane McLeod, the woman featured in Morgenson's story, is 47. She would have been only an impressionable teenager when Tammy Faye Bakker was all over the TV, preaching about sin and temptation and also appearing every week in a different outfit and shoes, not to mention the make-up and hair. If Tammy Faye was mostly concerned with keeping young women out of the perdition of spending Saturdays at the mall, I don't remember that part. I do remember first hearing that stupid line about the tough going shopping during the great moral awakening of the Reagan years.

Of course, "McLeod and the lenders" and those dratted secular schools weren't exactly the only parties involved in the rather complex dynamic of establishing the social respectability of recreational or "therapeutic" consumption. Brooks, writing in that influential arbiter of taste the New York Times, somehow fails to notice the role of the media in constructing popular standards for "risk" and "normal" consumption patterns. In Brooks' weird little world, Americans responded to "rising home prices" that they apparently directly perceived, without media intervention. It was those house prices that "gave people the impression that they could take on more risk," not the reporting on house prices or the columnists who solemnly opined that these prices meant that people weren't taking on more risk by buying or refinancing. How incredibly convenient that line is.

Some of us can have grave concerns about consumerist culture and excessive household debt without telling ourselves that "capitalism" is about to erase a couple hundred years of history and bring back Puritanism. We can also object to the way in which writers like Morgenson seem to want to erase the extent to which real people like McLeod are active participants in their own lives--in favor of seeing them as mere passive victims of lenders--without having to drag Calvinist notions of "sin and temptation" out of the cultural closet. But at least Morgenson's little secular morality plays do try to ground themselves in a set of empirical facts about lender practices as they exist today. Brooks' reductive fantasies about American history and the equation of spending and sin leave the world of empirical fact far, far behind.

Credit crunches and economic crises are bad enough, without having to put up with the endless cheap moralizing that always seems to accompany them. Unfortunately, we're going to have to put up with a lot of cheap moralizing from the media. At least this time around we've got the Internet and the blogs to make fun of it.

UPDATE: our 12th Percentile leaves us this jewel in the comments:

I would like to present David Brooks from 2004 arguing against David Brooks in 2008. From his NY Times article on suburbia, which has to be read to be believed:

These criticisms don't get suburbia right. They don't get America right. The criticisms tend to come enshrouded in predictions of decline or cultural catastrophe. Yet somehow imperial decline never comes, and the social catastrophe never materializes. American standards of living surpassed those in Europe around 1740. For more than 260 years, in other words, Americans have been rich, money-mad, vulgar, materialistic and complacent people. And yet somehow America became and continues to be the most powerful nation on earth and the most productive. Religion flourishes. Universities flourish. Crime rates drop, teen pregnancy declines, teen-suicide rates fall, along with divorce rates. Despite all the problems that plague this country, social healing takes place. If we're so great, can we really be that shallow?

The internet really does make it easy to show what idiots these people are.

by Tanta on 7/15/2008 10:05:00 AM

CR Update: In the title, Tanta used the term "infomercial" to suggest that the article read like an infomercial to her. In no way did Tanta mean to imply that the author was paid to write the article by any of the companies or individuals mentioned.

Just the other day an email message from a reader on the subject of short sales put me in the mind of this post from back in March, wherein we saw a New York Times reporter using an operator I politely called a "bucket of scum" as a source on state anti-deficiency statutes--when a quick perusal of the guy's website verified that he knows about as much about anti-deficiency law as I do about football (that's the one with the kind of pointy ball, right?). Even worse, the guy's website contained all kinds of tips for doing "creative" RE transactions that smelled to high heaven. At the time I was a bit amazed that a so-called legitimate news outlet could have spent more than 30 consecutive seconds with that dude's website and failed to conclude that he wasn't the kind of expert you quote in the Times.

So this morning I run across this John Wasik column from Bloomberg yesterday, which simply goes to show that no one ever learns anything.

*************

July 14 (Bloomberg) -- Where politicians and bankers see vexing liabilities in defaulted mortgages and foreclosures, Robert Lee sees opportunities as he picks up the pieces of the housing bust.

His company, Foreclosure Trackers Inc., which he co-founded with President David Phelps, is based in Huntington Beach, California, in a bank office building where some of the first subprime loans were created.

Buying defaulted mortgages at a discount, Lee encourages and enables owners to stay in their properties and avoid foreclosure. His company buys the loans, not the homes, then employs a ``work- out, not kick-out'' approach in working with homeowners.

Unless a comprehensive federal bailout reduces foreclosures, areas with the highest defaults will continue to show dramatic price declines as more properties fall into the hands of lenders and courts. The idea of discounting notes to reflect realistic market values may be the key to getting the market on its feet.

Please note that this column is not just some report on some entrepreneur who (claims to be) profiting big time from the bust. Wasik is trying to get us to believe that this is some signficant and important process for clearing the RE market.

Fortunately we get an example of how this deal works:

Say he finds a property with a $750,000 mortgage, but his broker opinion determines that the property is worth only $510,000 in the current market. He offers $255,000 for the note.

Conditions Attached

If his bid is accepted, Lee becomes the owner of the mortgage. He then contacts the homeowner and offers to cut the principal owed to $408,000 ``on the condition the homeowner is able to refinance with another lender within 60 days.''

If the borrower can refinance, the new lender pays off Lee's outstanding mortgage lien, netting him a profit of $153,000.

What if refinancing isn't an option? Lee may offer a loan modification, reducing the principal and interest payments.

He also provides services to improve credit scores so that borrowers can eventually refinance. Through his efforts in working directly with homeowners, he says less than 15 percent of defaulted first mortgages end up in foreclosure.

And we know that this example is realistic--that there are all of these lenders out there happy to take 30 cents on the dollar for a mortgage loan rather than just writing it down to 54 cents themselves and letting the borrower refi into an FHA program--because, um, this Lee character implies as much.

John Wasik, were you born yesterday? You see the term "credit repair" in the same sentence with "investing in defaulted mortgages," and you don't realize what kind of company you're keeping? How, exactly, are we going to get the RE market back on its feet if the elementary social compact among lenders--that you report accurately and fully on the repayment history of a loan you make, so that anyone asked to refinance it can know what it's getting into--is tossed away? This is what Mr. Lee's website says about "credit repair":

At Foreclosure Trackers, Inc. ("FTI"), we know the importance of a legitimate repair service to people who want to improve their credit scores. If you have had your credit damaged by foreclosures, bankruptcies, collection agencies, or inaccuracies on your report, you know how difficult it can be to remove these items and get back on your feet.

That is why FTI has gone to great lengths to affiliate ourselves with the best credit repair service. Both FTI and our members have tested the service, and everyone has come to the same conclusion: the service works with amazement to improve your credit score by removing disputed items, such as foreclosures. [Effusiveness in original]

"Inaccuracies"? "Disputed items"? If someone is willing to sell you a mortgage loan for 30 cents on the dollar, just how much "dispute" do you think there might be about its foreclosure status? What this is implying to me is that Lee's strategy is to 1) convince the original noteholder to remove the prior derogatory history from its credit bureau reporting and 2) fail to report derogs during the time Lee owns the loan so that 3) the borrower can get a refi with an artifically inflated FICO that doesn't give the new lender a true sense of the borrower's past performance. So, Mr. Wasik, who do you think ought to be the lucky take-out lender in this little scheme? FHA? Your tax dollars at work?

I don't even really see from my (admittedly rather dazed) perusal of this outfit's website where they really are the ones investing money in buying these defaulted loans. I see a lot about how they want to sell you, the gullible public, the secrets of how to do this yourself. Even if you don't, um, have any money to invest.

"How To Earn HUGE PROFITS In Defaulted Mortgages"

That would be font size, text color, and quotation marks used for emphasis in the original. It continues:

You can have success in this business, even if:

You've Never Heard of Defaulted Mortgages
You Have No Money To Invest
You Have No Experience Investing

Sounds like the kind of thing highly likely to save the economy: ignorant broke inexperienced people leaping into another Git Rich Kwik scheme. Who, you have to ask, are these people selling this dream?

The website helps us with that:

Robert Lee, CEO: Born in Los Angeles and raised in Orange County, Lee's invitation to the world of real estate can only be described as a happy accident. While visiting a friend in Seattle, Lee happened across a for sale sign listing a house for $33,000. Lee couldn't believe the asking price—at first, he thought it was the down payment. Knowing a good deal when he saw one, Lee purchased the house on a simple owner finance and was required to put 10% down, with no credit or income verification. Lee sold the property two years later for a $27,000 profit at the age of 24. He couldn't believe how easy it was. . . .

David Phelps, President: A lifelong resident of Orange County, Phelps began working in the financial sector in 2000. In spite of a rewarding career as a licensed acupuncturist and herbalist, Phelps decided to pursue his interest in real estate by plunging into the industry head first. Phelps almost immediately discovered a new set of talents as a loan officer and licensed real estate agent.

The website doesn't tell us how long, exactly, it has been since Mr. Lee was 24 years old, but judging by the second video on this page, it doesn't seem that long ago.

So does Wasik display any sense of skepticism at all in this column? Not exactly. There is this mention at the very end of "some pitfalls":

Many homes have never been occupied by owners or have been boarded up or damaged. Some mortgages were obtained fraudulently.

It can be even more complicated to locate, acquire and discount the notes, since only properties are typically advertised for sale. It's also essential to obtain the true market value of a home. Lee relies upon appraisals that give him a down-to-earth ``quick sale'' price, something you may not get from the average real-estate agent. There's a lot of complex paperwork involved.

Once courts get involved, it becomes even more difficult. Lee avoids buying notes in states such as Indiana, Ohio, Michigan and Pennsylvania, where, unlike California, foreclosures quickly enter the judicial system.

Oh. So Mr. Lee makes sure to buy notes only in states where FC is fast and cheap and doesn't get bogged down in the courts. Right. The states where current noteholders would be most motivated to accept 30 cents on the dollar. Sure.

Memo to the media: a great deal of the problem we have right now is the result of people who didn't know nuthin' about nuthin' deciding to make a killing flipping real estate. We will not solve that problem with an small army of people who don't know nuthin' about nuthin' deciding to make a killing flipping defaulted mortgage loans.

Oh yeah, and will you all just try to spend a little bit of time looking into these people before you decide to give them more free publicity? You can click on these links and read these websites for free!

All Bloomberg just did was give these dudes another press clipping to add to their "testimonials" page. I do indeed call that "journalistic malpractice."

OK, I put my drink down. I want to read more.

by Tanta on 5/30/2008 07:18:00 AM

Forgive me for once again falling into despair over the media's inability to report sensibly and critically on foreclosure and delinquency numbers. I should be immune by now. If you are wiser than I, just skip to the next post. If you still cradle to your wounded heart the battered but indomitable belief that even media outlets like Bloomberg can learn to spot the flaws in a reported statistic, and that there is a point to doing this, click the link below.

***********

The headline: "New Overdue Home Loans Swamp Effort to Fix Mortgages in Default." We will take this as a promise that the article is going to demonstrate something about the relationship between newly delinquent loans and workout efforts.

The lede:

May 30 (Bloomberg) -- Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing.

In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.

The last of eighteen paragraphs:

Last month's 54 percent "cure ratio" among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. The comparison may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.

So we start with an eye-popping number, and then only at the very end do we note that this number may mean much less than meets the eye. This is, in fact, what MICA said in its data release:

WASHINGTON, D.C. May 30, 2008 – Mortgage Insurance Companies of America (MICA) today released its monthly statistical report for April which includes a one-time adjustment to the number of defaults and cures and also notes an 11.7% increase in new insurance written year-over-year.

As a result of a major lender’s change to its methodology for recording delinquencies, and to how it reports them to MICA’s members, there was a sharp increase, to 73,880, in reported defaults in April. The increase includes both newly reported defaults for the month, as well as previously unreported defaults by this lender.

MICA’s members reported 39,584 cures in April. This statistic also reflects the above noted change in reporting defaults.

I assumed when I read this that somebody--a large somebody, since it significantly impacts the data--switched over from the OTS method to the MBA method of delinquency reporting. I do not know if this is the case or not. Before I published this article, however, I might have called MICA for a comment. In any case I might have been more cautious with headlining a number that is described as a "one-time adjustment" to the data collection. Burying that in the last paragraph is . . . disingenuous.

I'm also a touch troubled by the statement that "Last month's 54 percent 'cure ratio' among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March." That is literally true. However, the cure rate in December of 2007 was 54.1% and in January of 2008 was 51.4%. Could there be some seasonality in these numbers? Another confounding factor besides new delinquencies?

So what about the second half of the claim?

"Modifications are not occurring nearly at the numbers necessary to stem the foreclosure crisis," Allen Fishbein, housing director for the Consumer Federation of America in Washington, said in a May 19 interview. "People are still going into foreclosure when, with a writedown on existing principal, they could still stay in their homes."

In the first two months of 2008, lenders modified loans for 114,000 borrowers while starting 346,000 foreclosures, according to a study by the Durham, North Carolina-based Center for Responsible Lending. In April, 22 percent of the homes in the foreclosure process had been taken over by lending banks; a year earlier, that figure was 15 percent, according to Irvine, California-based data provider RealtyTrac.

Did you assume, when you read that second paragraph, that the 114,000 modifications were exclusive of (not the same loans as) the 346,000 foreclosure starts? It seems you were supposed to assume that. But is is true? "Foreclosure start" simply means that a legally-required preliminary filing (a Notice of Default, Notice of Intent, or Lis Pendens, depending on the state and the type (judicial or non-judicial) of foreclosure) has been made. That is a "start" because in most jurisdictions it will be another 90 to 180 days, or even more in some states, until the auction can be scheduled, the home sold, and the foreclosure "completed." My own view is that the "best practice" is to work hard to negotiate a modification, if possible, in the early days of delinquency before starting the foreclosure process. However, that is not always possible, and it is also "best practice" to continue to attempt reasonable workouts during the foreclosure process all the way up the day before sale, if necessary. There are certainly cases in which a borrower simply cannot be brought to talk to the servicer until the initial FC filing galvanizes him into it. All of this means that it is impossible to look simply at modifications completed in a period compared to foreclosures started in a period and conclude that the starts will never get a mod or that the mods were not effected after the FC start.

Besides that, where is the data to back up the idea that a 30% ratio of modifications to foreclosure starts is poor performance? I am personally not sure that much more than 30% of recent vintage loans can be saved. Back out fraud, flippers and speculators, and borrowers whose loan balances would have to be reduced by half in order to get a workable payment--which would most likely exceed the cost to the investor of a foreclosure--and 30% doesn't sound so shabby.

As far as the second claim--the increase from 15% to 22% of homes in foreclosure "taken over by lending banks," I'm prepared to read that literally. There is no jurisdiction in which a foreclosed home must be purchased by the lender at the foreclosure sale; all jurisdictions require public auctions in which third parties can bid. An increase in REO (lenders "winning" the auction) does not necessarily mean an increase in completed foreclosures; it can mean that fewer third parties care to bid on foreclosed homes. All the data I have seen recently suggests that this is the case: buyers are still wary of further price declines, and lenders are still bidding higher than potential RE investors. One therefore expects the FC-to-REO numbers to increase. But they can do that even in the absence of an increase in total foreclosures. In order for this statistic to mean much, we have to know how much of the increase is due to more foreclosures, and how much due to fewer third-party bidders.

So put these dubious statistics together--the rest of the Bloomberg article is basically filler--and you get anomalous data on new delinquencies, ambiguous data on modification-to-foreclosure-starts, and a claim about REO rates substituting for a claim about foreclosure completion rates. How about taking back that headline, Bloomberg?

You know, last year I might have had some more sympathy for these reporters. We were just newly into the whole problem and a lot of concepts--delinquency reporting methodology, foreclosure processes, various ways of reporting "cures" and "starts"--were all new to everybody except industry insiders and a handful of totally Nerdly blog readers. But surely by now we can have moved the ball forward a couple of yards? I am here to affirm that if you have been reporting on "the foreclosure crisis" for a year or more and you still can't ask basic questions about the press releases you read, you aren't doing your job.

I, Too, Need To Know Why These Numbers Are So Squirrelly

by Tanta on 4/16/2008 07:44:00 AM

Kind reader AK (bless you) sent me the link to this awful Slate piece on "walking away." It's a fact-free rehashing of the increasingly popular "walkaways are the new subprime" meme, worthwhile only as a kind of crystallization of everything that is wrong with this "story." Its burden of wisdom is the simple assumption that while those subprimers couldn't afford their mortgages, the Option ARM borrowers just don't want to be underwater after their loans recast and, um, they either can or can't afford their mortgages depending on how you do or do not look at it.

What kind of logic do you expect from an essay that begins:

California is to mortgage lending what Chicago is to pork bellies.

California (the whole state) has a famous exchange on which future prices of mortgage lending are determined? Well, no:

For years, that meant it was a place with soaring house values; today, the foreclosure rate across the state is twice the national average and going up fast.

"That meant"? Home prices in California bubbled and then busted because homes were traded like commodities futures? We're two sentences into the piece here and the wheels have already come off the logical wagon. The tone is set for the lede:

California should be the poster child for a mortgage-loan bailout. In few other places have so many taken on such onerous debts with so little equity. Unfortunately, the crisis in California is going to get much worse, and there is no bailout that will solve it. Why? Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages.

As usual, I'm amazed at how short memories are, since the "subprime crisis" was only just last year. And why just last year, when we had been originating large volumes of subprime loans for years prior to that? Well, 2007 was when those people who couldn't afford their mortgage payments suddenly lost the ability to refinance or to sell the home ahead of foreclosure. And why was that? Because home values were sliding in high-subprime-concentration markets. So maybe the price declines as of a year ago were "only" single-digits, as opposed to the "40%-50%" our intrepid Slate reporter forecasts for California. So? Underwater is underwater: if you cannot or do not wish to bring cash to the closing in order to sell your home, and you cannot maintain the payments, you end up in foreclosure, whether you're 5% under or 50% under.

Insofar as there's any sort of point here, it seems to be the unsurprising one that so-called "prime" borrowers last longer in an RE bust than subprime borrowers do. By the time prime borrowers get to the end of their ability to handle crushing mortgage payments, RE values have dropped further than they had for subprime borrowers. What else are we to make of this:

The most common subprime loans were known as "2/28" in the industry: 30 years, including a two-year teaser rate before the interest rate rose. Now these loans have reset, and we're seeing the fallout.

But prime borrowers, too, got loans that started out with low payments; if you bought or refinanced your house in the last few years, it's not unlikely that you have one. With an "option ARM" loan you have the "option" (which most borrowers happily take) of paying less than the interest; the magic of "negative amortization." The loan grows until you hit a specified point—the exact point varies with the lender; with Countrywide, it'll come after about four and a half years—when the payment resets to close to twice where it was on Day 1. . . .

The really amazing thing is that the meltdown in California is already happening and virtually none of these loans have yet reset.

Option ARM loans were heavily marketed to upper-tier home buyers in California. It's hard to know how bad the option ARM crisis will be before it actually happens, but Moe Bedard, an advocate in Southern California who advises homeowners on foreclosure and blogs about the crisis at Loansafe.org says that the difference in the time until the rate rises is the main reason that upper-middle-class Orange County (now facing foreclosures at a rate merely twice the national average) hasn't yet been hit as badly as places like Riverside.

The 2/28 "subprime" foreclosure crisis also started well before most of those loans had reset, as the failed flippers and borrowers with crushingly high DTIs even before reset were trapped by even modest drops in value. It shouldn't be surprising that Option ARM failures are beginning to occur before the payment recast.

But, as with the CBOT analogy, what's the point here? That well-heeled Orange County OA borrowers will not be able to afford doubled mortgage payments when their OAs reset, and that by then they will be underwater by 40%? This makes them "walkaways," whereas the subprime borrowers were just plain old "foreclosures"? The way I see it, we have two choices here. We can take the perspective that "we're all subprime now," or we can insist that in fact "we" aren't subprime, "we" are walkaways, and that's different.

Such "rebranding" leads inexorably to this sort of fantasy:

Consider, too, that, yes, going through a foreclosure kills your credit rating and makes it a lot harder to buy a new house—but as more and more prime borrowers go into foreclosure, it's perfectly possible that buying a new home a year later will in the near future be as routine and unsurprising as the once inconceivable idea that you can get a whole batch of new credit cards two years after a bankruptcy.

What a foreclosure and a "killing" of your credit rating does to you is make you "subprime." "Prime" is not a birthright; it is not an immutable characteristic like having blue eyes. The confident assertion that credit will be easily and quickly available to these borrowers formerly known as prime rests on a hidden assumption that they are unlike any other "subprime" borrower, and therefore will get preferential treatment in a year or two.

Mystification aside, this is a prediction that the subprime mortgage lending industry--and the investors therein--will have recovered sufficiently in just a year that this new large crop of subprime borrowers with a year-old FC on their records will be deluged with mortgage offers. Perhaps that will happen, but what makes anyone think it will happen just because these were once "prime" borrowers? Most subprime borrowers were once prime. With the exception of borrowers who have never had any credit, which is a fairly small group, subprime borrowers once had prime credit, and did not manage it well, and therefore now have cruddy credit records and FICOs. How, exactly, will these "walkaways" be any different from any other subprime borrower?

The whole thing is so nonsensical that I am forced to the conclusion that for this (and many other writers), "subprime" is code for "poor people" and "prime" is code for "middle and upper class people," hence the need for distinguishing terms for loan failure: "foreclosure" for the poor, "walkaway" for the non-poor. Foreclosure is something that happens to you against your will; "walkaway" is something you do to the bank as an exercise of control over your finances. If we can maintain these illusory distinctions, we can maintain "our" distance from "them."

In the realm of rhetoric, that is. I for one suspect that the economics of mortgage lending in a year or two will be somewhat less fantasy-driven than that.

by Tanta on 3/20/2008 09:07:00 AM

I suspect this thing in the NYT is going to get a lot of discussion.

They took out adjustable-rate mortgages at the peak of the housing bubble to buy homes they would otherwise not be able to afford. Or they refinanced existing mortgages to take cash out. And now, two or three years later, the day of reckoning is here.

These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.

It gets worse from there. A lot worse.

The first step for distressed homeowners, said Rhonda Porter, a certified mortgage planning specialist and broker in Seattle, is to pull out their loan documents and see what they say.

First of all, I really want to know what a "certified mortgage planning specialist" is. As a certified mortgage nonsense detector, I call BS. Second, that's the entire paragraph. Besides not noticing the rather savage irony of all these rich folks who are only now getting around to seeing what the loan documents say--so it's not just those dumb poor folk who do that?--there's no indication of what is supposed to happen next. Is it just me, or is there a hint here that the first thing people should do is check to see if there's some way to sue? At the end of the article is a little story that's likely to piss off plenty of readers:

Mr. Geller said he had heard of just one loan balance reduction won by a borrower.

That borrower, a real estate consultant in California who did not want to be identified because he feared angering his lender, said he used his understanding of state law to negotiate the refinancing. He bought a condominium two years ago for $450,000 and invested another $50,000 for improvements. His ARM had a 5.5 percent initial rate that was soon resetting to 7.25 percent. But his condo is now worth only about $350,000.

His lender agreed to give him a 6 percent fixed-rate mortgage and, he said, to knock $135,000 off the principal.

The agreement came only after he stopped paying his mortgage for two months. “I am very happy and grateful to the lender because what I owe on my condo now is in line with its worth,” he said. “I’m ecstatic.”

A "real estate consultant." (Isn't anyone just a broker anymore?) But what "understanding" of what "state law" did this dude use to get this deal done? Why is the dude "afraid of angering his lender"? He already got his deal . . . ?

Then there is this:

Borrowers should determine if they live in a state with nonrecourse laws. In general, lenders in those states cannot pursue borrowers for money owed. But these laws are complex and change often, so consulting with a lawyer may be necessary, Mr. Geller said. He has compiled a list of nonrecourse states at www.mortgagerelief formula.com/recourse.

I'll go for state foreclosure laws being complex, but changing often? Really? Like, how often? My impression has been that some of our recent troubles stem from the fact that foreclosure laws haven't changed in a lot of places since the Depression. Anyway, I was interested in that list because I have been asked for one several times. The link in the NYT piece is not formatted properly; try this. What you will get is simply a list of states with non-judicial foreclosure processes. Labelled "non-recourse mortgage walkaway states." Is this Geller simply incompetent, not understanding the difference between non-judicial foreclosure and antideficiency statutes? Or is he just trying to jump on the same bandwagon of youwalkaway.com? And how did he get to be a source for an article in the NYT, giving him "credibility" and free publicity?

I suggest spending a few minutes with Mr. Geller's website:

If you can get the lender to approve your short sale, you can walk away pretty much unscathed. You can have good credit. You can even fix any negative reports they may have made about you, reports that say you were late. And you won't face any more of those huge loan payments. You'll be free and clear, baby!

But first you gotta get there. The way to make sure that the lender says yes is to give the lender *exactly* what they need to see . . .

The way to sell your house quickly is to follow the formula I call the Sell Your House in Nine Days system. It is also called the round robin. . . .

The key here is convincing them [the lender] that the short sale price is right. They rely a lot on a broker's price opinion, or BPO. And there is a whole system of ethically and honestly convincing the broker that the selling price is a fair one. If the broker reports that your short sale price is fair, the lender will probably say "yes."

Of course you don't get the "details" of how this works unless you "download the report," and I am not sure my PC is well-enough protected to do that. But after the short sale, we get to Mr. Geller's advice for what to do now that you no longer own a home:

The shocking secret of how to buy without qualifying and without getting on the hook for a loan . . .

Here's the deal you are looking for. If you are in an area with $150,000 houses, find a house where the motivated seller has a $150,000 mortgage. And then buy the property "subject to" the existing mortgage.

It really is that simple. The seller moves out. You settle at the lawyer's office. Nobody tells the lender anything. You start making the payments.

The loan is still in Mr. Seller's name. Is that a problem? No. You are the owner. You have a grant deed on file at the county courthouse in your name. No problem at all.

Anyone can sell their house to someone else as long as they are still the owner, and title will transfer. Even if there are loans still on the house. Doesn't matter.

So in this situation, Mr. Seller signed a deed over to you. You checked the loan balance (punching in Mr. Sellers' loan number into the mortgage company's automated robot phone system) and now you have the keys and you have every right and privilege as the owner that Mr. Seller did.

But look what you did. You have the mortgage interest deduction which lowers your taxes. You own the house, lock stock and barrel. But you never had to get your own loan.

Many sellers will want you to pay off the loan. Of course they will. But they are motivated, remember? So you tell them that you aren't going to do that just yet. When will you? Maybe in a year or three. Maybe in five years. A motivated seller can be convinced to sell to you because they are relieved that someone else is stepping into their shoes. It's human nature to breathe a sigh of relief and let someone else (you) deal with the mortgage.

And it's as simple as that. There are wrinkles to this and things you should know, but it really isn't that hard.

Yes, this is the bucket of scum that the reporter has given credibility to on the pages of the Grey Lady. Is there left an editor who, to paraphrase Jackson Browne, still knows how to cry?

Please do go back and take note that the anecdote of the borrower who scored the $135,000 principal reduction turns out to be a story "Mr. Geller heard of."

by Tanta on 3/16/2008 11:00:00 AM

Dr. Krugman has inspired me to get back to the Muddled Metaphor Index. Longtime readers will know that the MMI emerged last summer as one of our blog's tools for measuring distress in the credit markets. The MMI is calculated by plotting the disintegration of metaphoricity in reports of credit market events against the general unwillingness to recognize reality until it bites you on the shoulderblade, and then chortling over the results. Some people question the science here, but we tell them to go jump in a desert.

Today's text is the reliable New York Times on Thornburg Mortgage's problems. Personally, the thing I like best about this article is that it makes no sense whatsoever to anyone who doesn't already know what Thornburg's business plan is. You imagine the average reader asking: so if Thornburg doesn't make these "Ninja" loans, how come they own all these securities full of them? The term "leverage" haunts the article like an elusive ghost that hints at a sinister presence but never quite fully materializes. That's because the whole thing just begs for another awkward metaphor to be piled on.

There are in fact several gems here:

Thornburg already had one near-death experience last summer, when the mortgage crisis first hit and its shares plunged. Racing from interview to interview, and huddling with investors and analysts, Mr. Goldstone managed to convince the market that his company could survive. He even managed to raise more than $500 million in fresh capital from investors.

This time, though, the outlook is more dire.

Specifically, the problem concerns Alt-A securities, an obscure part of the mortgage debt market that may soon become as familiar as the now-infamous subprime category. Thornburg holds billions in securities backed by Alt-A mortgages, which were considered safer than subprime but not rock solid.

Alt-A (short for Alternative-A) borrowers typically had good credit scores but lacked the documentation to lift them into the prime category.

“Alt-A has been the precipitating event; it’s just been feeding on itself,” Mr. Goldstone says. “You have AAA-rated mortgage securities trading with junk bond yields. That makes no sense.”

Yeah, it was all so precipitous. Unless you're some blogger who has been harping on the looming Alt-A problem for a year or so. Then it's more like a--oh, no, not a--AAACK!---

The story of Alt-A and Thornburg also illustrates why the current credit crisis is different from past panics, like the market crash of 1987 or the crisis a decade ago when Long-Term Capital imploded. Those were rapid-paced events, which erupted and then faded from view. This is more akin to a slow-motion, chain-reaction car crash.

Whew. I was just sure it was gonna be a train wreck, and I don't think I can handle any more of those. But of course it's like a car crash in the ocean:

IN other words, this isn’t the tip of the iceberg; it’s another iceberg entirely.

So it's a precipitous event that is also slow-motion, a chain-reaction like hitting one iceberg and almost going to the bottom but not quite and then sailing on for a while until you hit a different iceberg because after having hit the first iceberg you are still convinced that those little bitty chunks of ice floating on the waves don't have great big honkin' bergs under the surface because, like, how often does that happen?

And as Mr. Goldstone can tell you, few can predict who will be the next to feel the impact.

Um. Few complete uninformed idiots could predict this. I'd guess that an entire troop of moderately alert cub scouts could go take a look at some financial statements to see who else is overleveraged in the Alt-A sector and make a couple of pretty solid predictions, myself.

Whocoodanode? is alive and well.

by Tanta on 3/04/2008 09:30:00 AM

She's at it again.

Now, listen: this post isn't about defending actual incidents of fee-gouging. It isn't clear to me that the article in question has its hands on a case of actual fee-gouging. This post is about the idea that while people can write stuff for the NYT that makes no sense and get it published, the rest of us don't have to buy it.

It's a story that makes a claim:

Every home foreclosure is different, of course. But the Wellmans’ case shows the uphill battle facing many troubled borrowers who believe that they are losing their homes for questionable reasons, like onerous fees.

At minimum, I would expect a story about the reason for a foreclosure being onerous fees. I would also expect a story about how hard it is for borrowers to get a day in court ("an uphill battle").

What we got is a jumbled, fragmented narrative, told out of order, which is fashionable in the newspapers these days. I tend to suspect that this is because told in order, with full details, the story doesn't back up the headline. But I am cynical. Perhaps the real reason is that everyone else likes Faulkneresque conventions of narrative dislocation and evocative allusion rather than declarative sentences and Aristotelian unity. Stranger claims have been made before.

Whatever. To aid us old farts, I tried to put together all the actual facts reported in chronological order. This is what I got:

Our borrower, Wellman, built the house himself. He started in 1990 and finished in 1992.

In 1996 Wellman lost his job and got behind on "the mortgage." I don't know when the mortgage was made. I don't know who made it. Between 1996 and today, at some point, the Wellmans have filed BK five times. Have they ever completed one? Beats me.

In 2002, Nat City started foreclosure against the Wellmans. Apparently there was a problem with the assignment of mortgage having been filed subsequent to the FC filing. The judge seems to have slapped Nat City around a little, but did not dismiss the FC filing.

Apparently it got straightened out who owns the loan, because in 2003 the Wellmans signed a "forbearance agreement" with Nat City, the terms of which are undisclosed.

In 2004, Wellman asked a local accountant to look over his loan records, and the accountant said Nat City was off by $38,612. Wellman stopped making payments and got a lawyer.

It went to court, and in 2006 the accountant testified that the charges were improper. Nat City apparently testified that the charges were proper. The judge "found that the Wellmans were bound by the agreement they signed in 2003." It isn't spelled out what that means; I can only assume it means that agreement signed stipulated that the Wellmans would pay these charges that they subsequently objected to. I suspect it also means that the folderol about who really owns the note is no longer an issue, since signing an agreement to repay Nat City would mean the borrowers acknowledged that they owe Nat City. But we don't get that spelled out.

The thing apparently went to an appellate court, who apparently also found in favor of Nat City.

As of today, it appears that Mrs. Wellman has a job and Mr. Wellman is a self-employed inventor.

As of today, Gretchen Morgenson is still worried about the fact that a person testified to something in 2006, and the trial court didn't buy it. I'm wondering how often that happens.

So, anyway. The Wellmans have a history of financial distress going back for more than ten years. They got an accountant to work for them, and they have had a lawyer working for them for free for three years. They got a day in trial court and a day in appellate court. It appears that they have not made any mortgage payments--even regular payments, ignoring those contested fees--since 2004.

What is the obvious conclusion to draw?

Okay, now you can read the appellate decision.

A note to anyone in trouble with a mortgage: if you are asked to sign something, read it. If it stipulates that you have been represented by an attorney, don't sign it unless you are really represented by an attorney. If it has a dollar amount on it you are agreeing to repay, demand an itemization before you sign, not afterwards. If you really aren't sure that the other party to the agreement owns your loan, don't sign it. If it says that foreclosure will commence if you stop paying, it means it.

Best possible thing you can do: see a lawyer.

Worst possible thing you can do: read the New York Times.

by Calculated Risk on 2/29/2008 01:35:00 AM

Here are a couple of interesting articles on "walking away", aka jingle mail, or more technically "ruthless defaults".

From Ruth Simon and Scott Patterson at the WSJ: Borrowers Abandon Mortgages as Prices Drop

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes.
...
A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn't afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income.
...
What's different now, analysts and economists say, is that home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won't recover anytime soon, and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity. "If they haven't lived in [the home] very long and haven't put any cash in it, it's a lot easier to walk away," says Chris Mayer, director of the Milstein Center for Real Estate at Columbia Business School.

From John Leland at the NY Times: Facing Default, Some Walk Out on New Homes

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
...
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said
...
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College

Unfortunately these articles don't really advance the ball. Tanta did an excellent job of suggesting some question the MSM media could ask: Let's Talk about Walking Away

What we have, so far, is a series of industry insiders making a general claim that "ruthless default" is on the rise. What we do not have, so far, is any rigorous quantification of the extent of this problem, or even any really detailed definition of what "a borrower who could afford to pay" is. We have no one offering baseline measures (what, for instance, a lender's analytical models might have predicted is the "normal" level of walking away), and hence no clear sense of the magnitude of the "change" in borrower behavior and attitudes (not to mention much rigor in distinguishing between the two). Hence, we don't yet really know if it's a change in borrower behavior as much as a change in definitions, servicer data collection and interpretation, or media exposure. Or a handful of anecdotes that are being pluralized into "data."