Mortgage Write Downs

Citizen Wealth Financial Justice Foreclosure

bostonian2007FrontNew Orleans I’ve been harping on the drastic need for lenders (banks and their buddies) to write down significant parts of the homeowners’ outstanding balance to right size loans and prevent foreclosures, so I read an article in the Wall Street Journal by James Hagerty yesterday with eager anticipation hoping to find the industry was finally moving my way.  Unfortunately, most of it was a restatement of old positions in a new framework.

There were some new voices speaking plainly though.

Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, estimates 7.1 million of the 7.9 million households now behind on their mortgage payments will lose their homes to foreclosure if nothing is done to change current loan-modification programs. “Principal reduction is the only answer,” she says.”

But for many the chairs in the church haven’t changed.  Bruce Marks of NACA and John Taylor of the National Community Reinvestment Coalition have been long allies, and not surprisingly their position mirrors mine:  there have to be write downs.  Jack Schakett, formerly of Countrywide and now in about the same job with Bank of America concedes, as he always has, that there is a place for write downs, and believes they should be extended.  Wells Fargo, as always, continues to keep its head in the mud and believe that someone else will solve the problem they helped create.

Nonetheless, if a headline in the WSJ is going my way, that’s a breakthrough in itself.

There is also finally an admission about the real problem the banks have which is their disastrous balance sheets.  I was arguing about this just last week with an ex-mortgage broker, so I’ll be pleased when he hears this from some other source than me.  Hagerty lays it on the line:

“It is more complicated for financial institutions. U.S. banks, thrifts and credit unions held about $952 billion of home equity and other junior-lien mortgages as of Sept. 30, according to Federal Reserve data. If the principal owed on first mortgages is reduced, the institutions probably would have to write down or write off many of the second-lien loans, potentially sapping their capital.”


One solution offered for the banks was interesting and would involve regulators allowing banks a longer timeframe to write down the mortgages on their balance sheets so that they didn’t go under due to their own capital shortages.   Of course that’s what my CPA father used to call “creative accounting.”  Depositors, investors, and regulators would have to write on their palms to remember that banks are zombie institutions, but since the bailout, most observers have known that without having to make a note.

The only gallows humor in the article was the ridiculously self-serving and anti-political proposition put forward by Black Rock, a major mortgage investor, which in their dreams wants a fairy tale solution where bankruptcy judges would act as their magical godmother and wipe out credit card debts and 2nd lien mortgages for struggling borrowers before getting to their goodies in the prime mortgage.  Yeah, right!  Not in this world.

But, in this world, 7+ million underwater borrowers are crying for a solution, and writing down principle owed still seems like the only horse to ride.