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Bank Feels the Pain of Home Foreclosure
October 26, 2007 11:42 AM
by
findingDulcinea Staff
Countrywide Financial offers refinancing for adjustable-rate loans to avoid adding to its growing inventory of repossessed properties; meanwhile sub-prime debtors file for bankruptcy in a bid to keep their homes.
30-Second Summary
Countrywide Financial Corp., the biggest U.S. mortgage lender, has announced plans to refinance or modify up to 82,000 of the adjustable-rate mortgages (ARMs) on its books.
The bank described the move as an effort to assist borrowers whose interest rates will rise by the end of 2008.
But necessity must have played a part in the bank’s decision. One week in October saw 13,000 properties for sale on the Countrywide Web site, in contrast to the 5,000 that were advertised at the start of 2007.
With the housing market slowdown, more borrowers are finding their homes repossessed before they can be sold. Lenders who are unwilling to make a loss on these properties are then left holding an expanding inventory of real estate.
Countrywide’s answer is to renegotiate some of the higher-risk loans to allow homeowners to continue making mortgage payments.
The alternative for many borrowers is to file for bankruptcy. Figures for August suggest that a rising number of borrowers are taking that option.
Reactions to Countrywide’s announcement have been mixed, but mostly positive. The Wall Street Journal judged that the decision “certainly beats the Beltway alternatives” to the mortgage crisis.
The Los Angeles Times noted that “Countrywide wins no angels’ wings” for steering borrowers towards more affordable loans for which they readily qualify.
That point will have raised eyebrows at The New York Times. In August 2007, the Times ran a story about former Countrywide employees who alleged that the company deliberately sold riskier ARMs to borrowers who could have taken out a much safer product.
Commentators such as Andrew Leonard at Salon have drawn the inference that Countrywide hopes to counter accusations that its lending practices are predatory at a time when its CEO is under investigation for insider trading.
The bank described the move as an effort to assist borrowers whose interest rates will rise by the end of 2008.
But necessity must have played a part in the bank’s decision. One week in October saw 13,000 properties for sale on the Countrywide Web site, in contrast to the 5,000 that were advertised at the start of 2007.
With the housing market slowdown, more borrowers are finding their homes repossessed before they can be sold. Lenders who are unwilling to make a loss on these properties are then left holding an expanding inventory of real estate.
Countrywide’s answer is to renegotiate some of the higher-risk loans to allow homeowners to continue making mortgage payments.
The alternative for many borrowers is to file for bankruptcy. Figures for August suggest that a rising number of borrowers are taking that option.
Reactions to Countrywide’s announcement have been mixed, but mostly positive. The Wall Street Journal judged that the decision “certainly beats the Beltway alternatives” to the mortgage crisis.
The Los Angeles Times noted that “Countrywide wins no angels’ wings” for steering borrowers towards more affordable loans for which they readily qualify.
That point will have raised eyebrows at The New York Times. In August 2007, the Times ran a story about former Countrywide employees who alleged that the company deliberately sold riskier ARMs to borrowers who could have taken out a much safer product.
Commentators such as Andrew Leonard at Salon have drawn the inference that Countrywide hopes to counter accusations that its lending practices are predatory at a time when its CEO is under investigation for insider trading.
Headline Links: Personal bankruptcy and the Countrywide plan
In September 2007, the American Bankruptcy Institute reported that “consumer bankruptcy filings increased almost 23 percent from a year earlier,” according to The Wall Street Journal. Many of these applicants are driven to file for bankruptcy in a bid to hold on to their homes. The Journal refers to consumer advocate research that concludes that “the homeowners who are most likely to benefit from Chapter 13 [one form of bankruptcy] are those facing foreclosure because of a temporary financial setback, but who expect to be able to cover their mortgage payments in the future."
Source: The Wall Street Journal
In October, Countrywide announced that it would help up to 82,000 borrowers to modify existing ARMs that are set to adjust to higher rates before the end of 2008. “We are determined to assist borrowers who have the willingness and wherewithal to remain in their homes, but need a little help to do it,” said David Sambol, president and chief operating officer at Countrywide.
Source: The Financial Times
Opinion: Assessing the proposal
Eric Stein portrays the national mortgage problems as a crisis arising from “reckless lending practices.” Stein is a lender and senior vice president of the Center for Responsible Lending, a non-profit consumer advocacy group. He contends that current bankruptcy laws are unfair in that under them “investors and speculators may go through bankruptcy proceedings and receive loan modifications for the debt they owe on their vacation homes and investment properties. Yet current law specifically bars middle-class homeowners from receiving a similar remedy to save the roof over their heads. If bankruptcy law is like a life preserver, we’re reserving it for the strongest swimmers.”
Source: The Center for Responsible Lending
The Wall Street Journal writes that the most sensible response to the spread of foreclosures is for lenders to convert “sub-prime loans that are still performing into fixed-rate loans at a the lower variable rate.” This is Countrywide’s solution. Banks following this path have to accept a lower revenue stream, but that is better than dealing with a rash of foreclosures in a wilting housing market. “As many as a million borrowers nationwide might benefit from such treatment,” the Journal writes, “and for hundreds of thousands it could mean keeping their home.” The article is critical of Washington’s plans, one of which involves trimming 10-15 percent off the loans and then insuring the rest of the debt. According to the Journal, that would send out a signal to borrowers and investors “that Congress will save them from bad decisions” and put taxpayers at risk if housing values continue to decline. A couple of other Beltway plans are dismissed, leading to the conclusion that “you can’t bail out borrowers without also bailing out lenders and investors—and down that route lies endless taxpayer liability."
Source: The Wall Street Journal (registration may be required)
Andrew Leonard at Salon implies that one of the purposes of the Countrywide offer to lenders is to draw attention away from problems high up in the company’s structure. “So maybe now we should all stop talking about CEO Angelo Mozilo's $136 million stock dump earlier this year, and tell The New York Times's Gretchen Morgenson to get off Countrywide's case,” writes Leonard. “Nope. Sorry.”
Source: Salon
Although it judges that “there’s less to admire about Countrywide’s move than [the] numbers suggest,” The Los Angeles Times concludes that “elements” of the plan “set an example for lenders and investors, because they sacrifice potential (but likely unattainable) profits for the sake of avoiding foreclosures.”
Source: The Los Angeles Times
Background: Countrywide's problems and personal bankrupty
Countrywide Financial Corp.
Gretchen Morgenson reports on Countrywide and the mortgage crisis in an article that charts the rise in home foreclosures. In August, foreclosures were up 36 percent from the previous month to almost 244,000, more than twice the figure for August 2006. Morgenson, writing in September, opines that “borrower advocates who work with a broad array of lenders say that none make it harder to modify loans than Countrywide.”
Source: The New York Times
According to The New York Times, former employees from Countrywide Financial have described lending practices that showed little concern about whether borrowers would be able to keep up payments. Among the questionable aspects of Countrywide’s business was a computer system in the sub-prime unit that took no account of cash reserves when calculating what mortgage to recommend borrowers. This meant that borrowers were steered towards sub-prime loans when they should have qualified for better interest rates.
Source: The New York Times
Countrywide Financial Corp. was the brainchild of Angelo R. Mozilo, a butcher’s son from the Bronx, and David Loed, a founder of a New York banking firm, who died in 2003. The two men started the company 38 years ago, as explained in the opening paragraph of The New York Times’s roundup of Countrywide Financial stories.
Source: The New York Times
Personal bankruptcy
The Administrative Office of the U.S. Courts released figures in August 2007 that showed a slow, ongoing upward rise in the number of bankruptcy cases being filed in the United States. The bankruptcy rate is still lower than it has been at any time between May 1995 and January 2006. This drop in numbers after 2005 reflects both the increased difficulty in filing for bankruptcy after the Bankruptcy Abuse Prevention and Consumer Protection Act took effect and the surge in bankruptcy filings that preceded the act.
Source: The Administrative Office of the U.S. Courts
The Bankruptcy Abuse Prevention and Consumer Protection Act passed into law in October 2005, making it harder for consumers to wipe the slate clean of debt. The act is designed to direct filers away from Chapter 7 bankruptcy, in which the individual’s assets are liquidated to pay off creditors and any remaining debt is canceled. Now, insolvent debtors are more likely to apply for Chapter 13 bankruptcy, which means that they go on a five-year repayment plan. CNN covered the story when the act was passed in 2005 and supplies links to the credit counselors whom the act installed as gatekeepers of bankruptcy application.
Source: CNNMoney.com
Key Players: Angelo Mozilo
As Countrywide announced its plan to assist sub-prime borrowers by refinancing their loans, Forbes reported that a pension fund advisory group is seeking the resignation of Countrywide CEO Angelo Mozilo. The call for his departure follows reports that Mozilo is being investigated by the Securities and Exchange Commission regarding accusations of insider trading. Forbes writes, “Mozilo raised eyebrows by selling progressively larger amounts of company shares prior to a rash of bad news that drastically reduced the value of those shares.”
Source: Forbes
Reference Material: Housing market slowdown, bankruptcy and an '04 prediction of the sub-prime crisis
In September 2007, the number of sales of one-family homes in the United States were down 23.3 percent on sales for the previous September, according to the U.S. Census Bureau.
Source: The U.S. Census Bureau
The American Bankruptcy Institute, a non-profit research group, provides up-to-date news on developments in bankruptcy legislation and advice for business and individuals considering filing.
Source: The American Bankruptcy Institute
As far back as July 2004, financial analyst Peter Schiff wrote that given the interest rate environment of the time, there were no circumstances in which it would be advisable to get an adjustable rate mortgage. “That such a high percentage of people in the United States and elsewhere are currently opting for adjustable rate mortgages reflects a level of real estate speculation unparalleled in history,” Schiff argued.
Source: The Daily Reckoning
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