Friday, April 03, 2009

Can It Get Any Plainer?


And this is what Dugan's OCC says about it:

The OCC said it still does not have a solid explanation for why the modified mortgages are sinking into trouble. The agency revealed the trend in data released in December, which at the time threatened to scuttle a nationwide modification plan being pushed by the Federal Deposit Insurance Corp.

I have a solid explanation: it's called mathematics.

If someone got a "mortgage" that wasn't really a mortgage at all (defined as a time payment for money intended to lead to the free and clear ownership of the underlying deed) but instead was effectively either a balloon note or worse, a bought-down short-term rate paid for by loading the fee to buy down that rate into the fees associated with the loan (added to principal) then it is not possible to modify that loan on a sustainable basis, if the borrower could not make a fully-amortizing payment in the first place.

By the way, that is every single "Option ARM", "teaser rate attached" note, I/O loans and 2/28 or 3/27 subprime mortgages. The latter two have largely all defaulted; the former three categories have the bulk of their blowup still to come and they not only constitute a much higher dollar volume than 2/28 and 3/27 in terms of origination they're also concentrated in the "high value" areas such as California and Florida.

Since the presumptive reason that these loans were made in the first place (as opposed to a 30 year fixed mortgage) was that the buyer did not have the income to support a 30 year fixed mortgage, we are left with a house that the borrower cannot afford.

That's the underlying reality and no amount of arm-waving can fix it.

The correct solution to this problem is simple: default the damn mortgage and force the bank to eat their imprudent loan.

This will of course cause the value of the house to be "reset" (at foreclosure auction) to its economic value - a process that must take place.

Everyone in government and banking has for the last two years and change tried to avoid the fundamental reality: house prices must reset to their economic value, which is relatively easy to define - it is represented as a house price of approximately three times median income. Since median income was also "expanded" through bogus and in fact fraudulent financial activities, it too must contract, which means that in terms of "overinflated" salaries (and parts of the country where that was a major component of the wage base) house prices probably need to contract to two times those overinflated incomes!

This faux "bewilderment" is infuriating. There is nothing complicated about shelter pricing - it simply can't consume more than a little less than 30% of your pretax income, all-in, or it is unsustainable. That 30% of gross income must over time lead to a clear deed, or it is unsustainable.

That's it, in the main.

Those who lack the economic means to do this must take advantage of higher-density living (e.g. apartments) where the "per-unit of living space" cost is lower due to the commonality of elements (e.g. parking, land, tax, HVAC plant, roofing, etc) that can be shared among living units.

This is basic economics folks. There is nothing complicated about any of it; our government is instead hellbent and determined to pursue "pie in the sky" nonsense that, on the math, simply cannot work.

Our economy will not turn around until we face reality, because the math is never wrong, and over longer periods of time it always asserts itself.

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