The Dumbest Stimulus Plan to Date

Look how far we've come, Fools: One year ago, banks were ridiculed for making so many bad loans. Today, they're being threatened with fines for not making enough.

Earlier this year, the government enacted a $75 billion stimulus program to entice banks to modify mortgages. So far, the program has been a dud. In order to ensure that banks and mortgage servicers are doing their part, the Treasury warned on Monday that those not modifying fast enough "will be subject to consequences which could include monetary penalties and sanctions."

Modify more mortgages, or be fined. Yikes. This is serious business. But why is the program failing so hard that banks and servicers have to be threatened with fines?

First, the numbers. There are two phases to the modification process: the trial modification, where a bank or servicer modifies the loan, and a second step, in which the modification is made permanent. In order to become permanent, borrowers have to make three on-time payments and document their financial condition.

So far, trial modifications have been on fire:

Month

Trial Modifications Granted (cumulative)

May and Prior  

50,130

June

143,276

July

253,673

August

386,865

September

487,081

October

650,994

Source: makinghomesaffordable.gov.

No complaints there. The original goal was to hit 500,000 trial modifications by early November. Done and done.

Permanent modifications are another story. Data is hard to come by -- the Treasury conveniently leaves out current figures -- but with straight faces, the Treasury and Department of Housing and Urban Development recently predicted that 375,000 trial modifications will be made permanent by year end.

Now here comes the punchline: The Congressional Oversight Panel reports that from March until September, only 1,711 trial modifications were made permanent. Ouch.

Among these 1,711 permanent modifications, just one small servicer, Ocwen Financial Group (NYSE: OCN  ) , claims it alone accounts for 44.6% of the total. Back out Ocwen's percentage, and the rest of the mortgage industry made a nearly insignificant number of trial modifications permanent.

So what, you ask, is tripping up permanent modifications? Let's count the ways:

1. They don't work
The numbers on modification redefaults -- mortgages that fall back into default after being modified -- are atrocious:

Modification Date

30 Days Delinquent, 3 Months after Modification

6 Months after Modification

9 Months after Modification

12 Months after Modification

First Quarter 2008

40.3%

53.6%

60.7%

65.9%

Second Quarter 2008

46.4%

59.0%

63.9%

67.0%

Third Quarter 2008

49.6%

60.3%

65.3%

--

Fourth Quarter 2008

45.2%

55.8%

--

--

First Quarter 2009

42.7%

--

--

--

Source: Office of Thrift Supervision, Office of the Comptroller of the Currency, Sept. 2009.

Odds are a modified mortgage will fall back into default before long -- maybe even before it has a chance to become permanent. Let's say the Treasury is right, and by year's end, 375,000 trial modifications become permanent. If the trend in redefaults stays the same, 240,000 or so of those mortgages will end up back in default within 12 months. Hip. Hip. Hooray.

2. Banks aren't dumb
Okay, most are. But knowing the odds that a modification will redefault, some banks might find it worth foreclosing today, rather than waiting a few months and foreclosing on a home that continued to lose value. They want to do this like a Band-Aid: Rip it off, get it over with, and move along. The slower you pull, the more it hurts.

3. The trial modification was a joke
As shown by the threat of looming penalties, banks and mortgage servicers are under pressure from the Treasury to get trial modifications out the door.

Quantity over quality, in other words. A good example of this comes from The Washington Post, which reports that Bank of America (NYSE: BAC  ) started issuing trial modifications without "getting all the documents first" from borrowers in order to make up for being "slow out of the box."

How many of these take-my-word-for-it trial modifications will end up going nowhere? Who knows. But if you remember how the no-doc lending craze of 2003-2007 turned out, it probably won't be pretty.

4. Wrong target
Plenty of homeowners might think a mortgage modification will bury their housing nightmare for good. Plenty also realize that post-trial modification, they're still in over their heads.

Most modifications either capitalize missed payments back onto the loan balance, or reduce monthly payments with lower interest rates or extended amortization (read: kicking the can down the road).

But precious few modifications actually reduce the principal balance owed. And lower monthly payments don't change the fact that you owe $X, while your house is worth half of X, and that you could be making minimum monthly payments for decades before that changes. Once homeowners realize this, it's often rational to hand the keys back to the bank and walk away.

Leave them alone!
Let's cut to the chase: Penalizing and fining banks for not modifying enough loans is insane. It's dangerous. It's unfair. And most important, it's ironic. This crisis came about after myopic banks like Citigroup (NYSE: C  ) pushed through shoddy loans as fast as humanly possible. Now we're talking about penalizing banks for not doing this.

There are banks that kept their noses relatively clean during the boom years. JPMorgan Chase (NYSE: JPM  ) . Wells Fargo (NYSE: WFC  ) . BB&T (NYSE: BBT  ) . US Bancorp (NYSE: USB  ) . The last thing we want is to impose penalties on these banks for not lending stupidly enough.  

Fool contributor Morgan Housel doesn’t own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


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  • Report this Comment On December 04, 2009, at 6:32 PM, tnk4800 wrote:

    "There are banks that kept their noses relatively clean during the boom years. JPMorgan Chase (NYSE: JPM). Wells Fargo (NYSE: WFC). BB&T (NYSE: BBT). US Bancorp (NYSE: USB)."

    Nothing could be further than the truth.

    They were all in up to their noses, equally culpable in deceit of investors and borrowers alike....They ( banks mentioned) were just smart enough to bail and unload their bad mortgages, then bold enough to proclaim they did it.

    " The last thing we want is to impose penalties on these banks for not lending stupidly enough."

    That part of your statement is true.

    However, all of them, including JPMorgan Chase (NYSE: JPM). Wells Fargo (NYSE: WFC). BB&T (NYSE: BBT). US Bancorp (NYSE: USB) most especially Goldman Sach's should have been immediately closed and their executives, middle managers, appraisers, loan officers should all be held criminally culpable. Take their homes away.

    There are no grey areas on this subject. They are thieves.

    Punishing banks with meaningless fines for any of their known questionable behavior's is just a waste of time and does nothing to discourage further atrocities and crimes. Further it's an insult to all of us.

    PS . Moody's and S&P exec's too.

  • Report this Comment On December 04, 2009, at 8:49 PM, tkell31 wrote:

    I agree, they should all be charged with money laundering and thrown in jail. Now they insist they need to be paid even more money for their expertise. Seriously? I get that they are smart, but they are also borrowing money at 0% and lending it out from 5-30%. You really dont need to be that smart to make money, and frankly anyone who wrote a 300K loan to a guy making 30K is either really stupid or a criminal either way not someone I want in charge of large amounts of money.

  • Report this Comment On December 05, 2009, at 6:30 AM, TMFCop wrote:

    Who's the criminal, the banker who followed the rules the government put in place, or your local Congressman and Senator who set up the game in the first place?

    Don't get me wrong, the paydays going on at Goldman, Bank of America, and other financial institutions is galling and outrageous. BUT, and it's a big but, who set it up that way?

    It was the politicians in both parties and the regulators they appointed that crapped their pants last year and bailed them out so they could live to hand out bonuses another day. They were protected from any bad decisions they made.

    So who should you really be angry at? The ones who screwed up, but were handed billions of your dollars to do it again? Or the politicians who gave them the money to do it?

    For me, it's the politicians who are the real criminals here. But they'll insulate themselves from criticisms and keep pointing their fingers at the big, bad bankers and their bonuses to deflect attention away from their own culpability.

    Anytime you feel anger at the bankers (and I do, regularly) just remember how they got to do what it is they're doing, and then you'll redirect your animosity towards those who truly deserve it: those who sit in Congress and voted for the bailouts and every other stupid regulation that's been enacted.

    Rich

  • Report this Comment On December 05, 2009, at 11:43 AM, DontFightTheTape wrote:

    Forget about the evil the large financial institutions did. And I don't care what's right or wrong when it comes to making money in stocks. I want to make money on the Financials and Friday's tape mysteriously showed strength. Why?

  • Report this Comment On December 05, 2009, at 12:23 PM, RaulChapin wrote:

    TMFCop: Bravo!

  • Report this Comment On December 05, 2009, at 8:57 PM, plange01 wrote:

    everytime you see a GM commercial you have to cringe thinking it was paid for with taxpayers money!we need to force the government to cut off the welfare checks to GM and get this disgrace closed for good...

  • Report this Comment On December 06, 2009, at 2:55 PM, defridgerator wrote:

    Rabble Rabble Rabble!

  • Report this Comment On December 06, 2009, at 8:12 PM, mikedudical wrote:

    The smaller Bank & Credit Unions are more inclined to help borrowers because they aren't getting bailed out like the big Banks are. When you lose, they do too. The smaller Banks have huge inventories of repossessed cars and foreclosed homes too that has led to over 130 Bank failured this year alone (see: http://www.repofinder.com). Until the little guys get the same treatment as the big guys, the problem will not end.

    The mother of all stimulus bills has failed my friends.

  • Report this Comment On December 07, 2009, at 6:55 AM, titledan wrote:

    Pay attention to the players...

    Michael Dell, George Soros and a number of other money men like Steve Mnuchin and Dan Neidich (former Goldman Guys) have found a "profitable venture" in the old Indymac now One West Bank.

    If these guys have put their money where their mouth is one is left to ask, "What do they know?"

    Will the Dell you buy for Christmas help fund your neighbors foreclosure?

    "Dude You're Getting A Dell" could have a whole new meaning. It could mean another process server has dropped the foreclosure bombshell on another American Family suffering from the subprime mortgage crisis and a lousy economy.

    That's right!!!

    Michael Dell has joined forces with a few of the 21st Centuries newest Robber Barrons. MSD Capital, L.P. is part of the partnership formed to purchase Indymac from the FDIC. The new company is IMD Management Holdings and they are running One West Bank which is among the worst performing lenders/servicers when it comes to offering distressed borrowers assistance.

    Calls to Dunes Capital and IMB Management Holdings are ignored as the new corporate philosophy of throw the deadbeats into the streets and tell them to go scratch has permeated the entire company.

    Managers who under the supervision of Sheila Baird and the FDIC use to help borrowers with a true empathy now dish out the lies of their corporate masters. Customer service representatives now tow the company line and Deny, Deny, Deny is the new corporate motto.

    In lawsuits, complaints and interviews, borrowers contend that Indymac (Now One West Bank) denied loan modifications because borrowers failed to submit unimportant paperwork; because Indymac phone log notes did not detail discussions correctly or at all; because paperwork sent had mysteriously disappeared and as such was deemed "never submitted", borrowers have been told routinely that "their investor doesn't allow modifications", borrowers have had "phony modifications" sent that were actually just a sleazy attempt at collecting arrears never intended to be really honored by the company and much, much more.

    As I follow the exploits of borrowers who are unfortunate enough to have one of the Indymac Alt-A loans that were able to close within days of application because of lax underwriting guidelines and the knowledge that they could sell the "toxic paper" off their books before anyone would know the debt couldn't be repaid, I am reminded of the Francis Ford Coppola Movie "The Rainmaker".

    Todays One West Bank follows the lead of the movies Great Benefit Insurance Company whose first, second and third courses of action are to deny a claim, hoping the people will give up or die. In one scene an insurance company employee reads a letter written to an insured "Dear Mrs. Black, On seven prior occasions this company has denied your claims in writing. We now deny it for the eighth and final time. You must be stupid, stupid, stupid."

    I have seen letters to Indymac borrowers along the same lines, their newest tactic is a letter that explains how complicated it is for the "stupid, stupid, stupid borrower" to understand who the "investor" in their loan is.

    These tactics are apparently very good for mortgage company profits.

    How a man like Michael Dell whose philanthropic efforts are to be commended could be dragged into investing with the kind of creatures who would treat people this way is beyond me.

    But it certainly begs the question, does the phrase "Dude You're Getting A Dell" now mean the same thing as "You've Been Served A Foreclosure Notice"?

    Does Michael Dell actually subscribe to the philosophy of the Robber Barrons who deny, deny, deny in the hopes that suffering families will give up or die?

    Come tell us your Indymac Horror Stories at: http://www.LoanModMan.com/

  • Report this Comment On December 07, 2009, at 7:01 AM, titledan wrote:

    Is Indymac now One West Bank giving the screws to distressed borrowers or cooking the books and delaying the inevitable fall of their stock price when the perverbiable crap hits the fan?

    You be the judge...

    As anyone who has tried to get assistance on their toxic predatory loan from Indymac knows, since the takeover by two former Goldman Sachs Blue Bloods the bank has been stonewalling and pulling out all the stops to prevent loan modifications.

    While under the supervision of Sheila Baird the FDIC the modification flow was impressive and the corporate philosophy was geared towards actually helping borrowers.

    In January 2009, the FDIC sold off the mortgage portfolio to a company called IMB Management Holdings, LP. After the sale Indymac emerged as One West Bank.

    The deal included the purchase of $16 Billion in mortgages for $13.9 billion. The Goldman Blue Bloods from Dunes Capital were also able to get some other sweeteners for their efforts $7 Billion in assorted securities and more than 30 banking branches.

    This sale is probably one of the most destructive moves against homeowners suffering from the burden of trying to make payments on their predatory subprime loans since the beginning of the mortgage meltdown. Any homeowner hoping to get help from the "tycoons" who bought this company are in serious trouble.

    Now that the Robber Barrons from Dunes Capital Dan Neidich and Steve Mnuchin are at the helm they have recruited Terry Laughlin, former Chairman and CEO of Merrill Lynch Bank who masterfully makes public statements that sound great on the surface but are loaded with qualifiers such as this one from August 11, 2009 "Going forward, One West will apply HAMP to all of the eligible loans that it owns as well as all eligible loans that it services for third parties". He didn't tell you that have figured out how to internally tweak the numbers to reduce the number of "eligible" loans. They have also taken a hard line on telling borrowers looking for assistance that their "investor" doesn't allow for modification. Never mind the fact that under their pooling and servicing agreements they have broad latitude and authority in granting loan modifications.

    I am reminded of the scene in the movie Wall Street when Gordon Gecco buys Bluestar Airlines and reveals his plan to crush the union and sell off the pieces. Welcome to a real life version of that story, starring the robber Barrons from Dunes Capital Dan Neidich and Steve Mnuchin.

    They purchased Indymac for 40 cents on the dollar, now when they foreclose on a property if they can recover half of the loan amount, they will still make a 20 percent profit. This is why they are stonewalling, lying to customers and foreclosing on properties faster than bureaucrats waste money - PROFIT.

    Immediately after taking over Indymac the slick characters at the top instituted a deceptive program where they offered up "phony modifications" to troubled homeowners that they had no intention of instituting. They duped thousands of homeowners with this scam, the modification terms appeared to be fantastic and the distressed homeowner's believed that they had saved their homes. They signed the documents and sent along the required initial payment. Indymac then cashed the check, and promptly issued denial letters that stated upon "further review" you do not qualify for a modification, the funds you sent will be applied towards your arrears. Even worse they continued post haste with foreclosure activity on these files. What a great way to fill the coffers with cash immediately after buying the company. These guys got a better education at Goldman Sachs than they offer at Harvard Business School.

    Suffice it to say that the newly emerged One West Bank does not operate in good faith when borrowers ask for assistance. Instead they use every trick in the book to screw their customers so that the Robber Barrons can continue to Raid the Corporation.

    If you are an Indymac customer search for one of the many class actions that are beginning to pop up against Indymac and join the class.

    Original Article By LoanModMan - All Rights Reserved

  • Report this Comment On December 07, 2009, at 1:25 PM, mountain8 wrote:

    How 'bout this.

    1. All "balloon" type loans are illegal.

    2. All mortgages are basic thirty year no frills, one rate, one page, no increase or decrease in payments.

    3. All mortgage rates are legislated and permanent at 3.5%.

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