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HousingWire Propaganda Not To Be Believed, Part 1: Re-Analyzing the Data
By Abigail Caplovitz Field | December 3, 2012
Friday HousingWire ran a six-and-a-half page big bank/mortgage servicer propaganda piece called “Living Large“, by Tom Showalter. The article, subtitled “A person’s lifestyle plays into whether they will pay their mortgage after a loan modification”, purports to explain why people default on loan modifications. Instead, it spins a bank-exonerating morality play not justified by the data supposedly being interpreted.
I’ll get to the morality play and the “irresponsible borrower” propaganda it represents in my next post to keep this one to readable length. First, to clearly show the wrongness of the bank-serving mythology being sold as its interpretation, I’m going recap the data the ‘article’ presents to answer the questions the underlying study apparently aimed at: why did so many people with mortgage mods made in 2009 default on those mods by 2011? And what needs to be done to make mods more successful going forward?
Note: I can’t assess the data quality because I don’t have access to the underlying tables and sourcing info; I am working off HousingWire’s/Showalter’s analysis of it. I just take his numbers at face value, though as I discuss below, however, something is screwy either in the some of the data or Showalter’s reporting of it.
Regardless, after looking at the data as presented by Showalter, the answer’s clear: People defaulted because the loan mods weren’t steep enough to make them solvent. To get successful mods in the future, payment reduction needs to be enough for borrowers to be solvent again. That’s all. Importantly, a post-mod solvent borrower is what would’ve happened if the loan restructuring were allowed to happen in bankruptcy; we’ve long understood what dealing with debt crises takes.
The Data: Tremendous Financial Stress, Inadequate Modification
So let’s look at the data as described by Showalter. Here’s the setup:
A control group of a random sample of 1 million people with mortgages in 2009, skewed to be a little more than 50% subprime, Alt-A and jumbo prime, was compared to a random sample of 55,000 loans modified in 2009 and tracked through 2011. (Showalter does not say if the modified loan sample is a subset of the control group or not.) The debt loads, bill paying performance and other characteristics of the people in both groups, and of people within the modified group, were compared. In fact, the people in the modified group were broken out into seven different groups, A through G.
So what do we learn about these various groups? The metric most discussed is who was seriously delinquent–60-days or more past due–on credit lines from 2007-2009. This data point is fixated on because, according to the analysis, it is the overwhelmingly strongest predictor of defaulting on a 2009 modification by 2011.
Turns out the baseline borrower–the average borrower in the million person sample of people with mortgages in 2009–was seriously delinquent with 16% (1 in 6) of their “active credit lines” sometime in 2007-09. Think about that: the average borrower with a mortgage in 2009 became seriously delinquent on one or more accounts in 2007-09. That is quite a backdrop of financial stress.
So how do the people who qualified for a mortgage modification compare? Unsurprisingly, mod recipients were even more debt stressed: 30% of their accounts had been seriously delinquent during 2007-09. Mind you, they’re not deadbeats; they were keeping 70% of their accounts current. Still, they were struggling much more than the average mortgage holder.
What about the people who defaulted on their loan mod by 2011? Turns out they were even worse off, having been on average behind on half (51%) of their credit lines during 2007-2009. No surprise there–people with the most debt stress at the start continued to have the most trouble paying their bills. Still, that’s not the whole story.
See, the data show that the tipping point at which “loan modification redefault performance erodes substantially” is serious delinquency on 25% of accounts in 2007-09. But wait–the average for all modified borrowers is 30%! There’s only conclusion possible: the mods were systematically inadequate, unable to address the financial crisis faced by the average person they purported to help.
Redefaulting Data Screwy as Reported
How likely to redefault? Depends on the subtype. At best one in ten redefaulted (11%, subtype F, representing 2% of the sample), and then one in four (26%, subtype G, 3% of the sample). That leaves 95% of the modified borrowers redefaulting at a higher rate, and also signals that the data are screwy, at least as presented by Showalter.
See, he says the average redefault rate was 30%. Group A, which came in at 30% redefault rate, represents 22% of the sample. If 5% of the sample is below the average, and 73% of the sample above, shouldn’t the average be higher? It’s not like the other rates were very close to the average. Subtype C comes in at 34%, D at 37%, and E and B, which combined account for 56% of the loan mods, redefaulted at 41% and 51% respectively. No way that average is 30%; either Showalter or the data are just wrong.
UPDATE: The sentence Showalter writes is “These borrowers…redefaulted at below average rates (average redefault rate <30%).” I read that as meaning the average redefault rate is 30%. Otherwise the 30% is a meaningless, arbitrary number. But considering that a 30% average doesn’t make sense, per the above, and given how incoherent the data presentation was generally, maybe Showalter doesn’t mean the average is 30%. Maybe he picked 30% just because it was the first round number above 26% and 11%, the redefault rates of the groups in question, and the average is in fact higher. Doesn’t really matter.
The Mods Were Inadequate
It’s not just the pre-mod financial stress data that shows mods simply weren’t substantial enough to work. It’s the other data Showalter fixates on, namely what people did with the cash freed up by the mod. Given the “Living Large” headline, I expected to read that redefaulting, ‘bad’ borrowers blew their mod-freed up cash on shopping sprees, decking out their lives with flat screen tv’s, jewelry and vacations. Living Large is about self-indulgent pleasure chasing, isn’t it? But here’s the “lifestyle” choice that Showalter says make some borrowers good, and some bad: whether the borrowers decided to use the cash to pay Peter (the mortgage bill) or Paul (the revolving debt/credit card bill.) Seriously.
Showalter writes:
“the borrowers in the high redefault group applied their discretionary cash to their distressed revolving debt, significantly reducing the proportion that rolled to a more serious level of delinquency. …The low redefault group behaved much differently. By 2011 they were letting their revolving debt role to more than 60 days overdue at a much higher rate.”
Since when is someone “Living Large” by paying down some bills while falling behind again on their mortgage? Snark aside, here’s the key point: both groups–the high redefaulters and low redefaulters–are still insolvent after mortgage modification. They still can’t pay all their bills even though they are trying to.
Showalter talks about high redefaulters paying down distressed revolving debt. He doesn’t claim the high redefaulters rang up large new debts with the cash, just that they chose to pay existing creditors other than the mortgagee.
Mods Should Make Borrowers Solvent
Let’s remember the context for these mods: our nation faced, and faces, a housing and foreclosure crisis triggered by the collapse of a lender-inflated, fraud filled housing and housing-related securities bubble. The crisis has been exacerbated by the unemployment crisis of the Great Recession. Our government stepped in to help, and responded quickly to save the bankers and Wall Street. The big help for Main Street was supposed to be loan modifications/refinancings.
Seen through the lens of public policy aimed at avoiding foreclosure, the inadequacy of the mods is even more obvious. Why did the government let the banks do mods that left people still insolvent?
But wait, banks might say: it’s not fair to put the homeowner debt reduction burden solely on the mortgage; why should our payment be cut so much that the borrower can service all their debts post-mod? Why not force the other debt lines to take a hit too? A variation on this whine is: but wait, by reducing the mortgage payment so much, you’re hurting pension funds and other investors, folk we don’t want to hurt.
Here are my responses:
Dear Bankers:
If you hadn’t falsely inflated principal balances by suborning appraisal fraud and adding fake demand to the marketplace by abandoning underwriting, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t engaged in widespread predatory lending including steering people into more expensive mortgages when they qualified for cheaper ones, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t engaged in predatory servicing, misapplying payments, forcing borrowers to purchase grotesquely priced insurance policies (even when they were maintaining insurance of their own), and charging rolling late and other junk fees, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t worked so hard to kill mortgage-loan restructuring in bankruptcy, which would have led more people into bankruptcy and thus forced other creditors to take a hit too;
If you hadn’t defrauded homebuyers-as-taxpayers by making false mortgage insurance claims;
If you hadn’t defrauded homebuyers-as-pension-fund-participants by lying about mortgage-backed securities to the investing pension funds;
If you hadn’t criminally manufactured documents to foreclose on people’s homes;
It would have been enough to justify you lowering the mortgage payment to make borrowers solvent that you were bailed out with tax dollars and not held accountable for any of your crisis-causing misdeeds.
Dear Investor Protectors:
The issue isn’t whether the mortgage payment should be modified sufficiently to allow borrowers to become solvent. It’s who should pay for that modification. I agree with you: the banks should pay. There’s nothing about modifying the amount of the payment due you that comes out of the borrower’s pocket that requires investors to take the hit for the difference, except investor passivity and comparatively (to the banks) weak political power.
The Bottom Line
Insolvent people will default on debts owed, making the choice that seems most rational to them about whether to pay Peter or Paul. Public policy aimed at keeping people in their homes based on loan mods is a total failure if the loan mods leave borrowers insolvent. And apparently the 2009 loan mods did just that. And that failure is unconscionable against the backdrop of banker wrongdoing and government solicitousness of bankers.
Abigail Field: HousingWire Propaganda Part II – The Irresponsible Borrower Myth, Harry & Louise Style
By Abigail Field, a lawyer and writer. Cross posted from Reality Check
Monday I did an analysis of a study HousingWire reported as showing that profligate borrowers were the reason many 2009 mortgage modifications failed. I analyzed the reported data to show the 2009 mods left borrowers insolvent, and said it’s not surprising that mods that leave borrowers insolvent fail. In the ‘article’, Tom Showalter rejected the idea that mod terms mattered. Instead he claimed the borrowers’ “lifestyles” explained who defaulted and who didn’t.
But here’s the thing. As I explained Monday, the key “lifestyle” choice was which debt to default on: when insolvent, did the borrower pay Peter (the mortgage servicer) or pay Paul (store/credit card debt)? Indeed, the study was a marketing tool trying to sell the ability of a matrix invented by Veritas to identify which potential mod candidates would pay Peter, and which Paul, so the banks could modify loans only for the people who picked Peter. That focus makes the invocation of the irresponsible borrower myth in the article particularly egregious–both borrowers are trying to be responsible in the face of insolvency.
The Morality Tale
Showalter pushes the ‘it’s not the mod terms, it’s the bad borrower’ idea with far more than the “Living Large” headline. He personifies the data by inventing two couples, pitched as archetypes of good and evil, probably hoping to copy the policy-killing success
of Harry and Louise.
Showalter’s heroes are subtype G, the 3% of the sample that redefaulted on their mods “only” 26% of the time. He calls them Lois and Eddie, a small town Midwestern couple who’ve been married 20 years, have kids in the local school, work at the mill, and are deeply “entrenched” in their community. They’re not underwater on average, holding 9% equity in their houses. And they’ll do anything to hold onto their houses, because
For Lois and Eddie, their lifestyle–and their values–demand that they save their home. They derive their identity and their purpose from their community. Losing their home would mean losing membership in their community, which is a big part of what makes Lois and Eddie the people they are. A foreclosure would cause Lois and Eddie a great loss-of-face among friends, co-workers and family. Their employers might take note as well.
No wonder they choose to pay Peter over Paul, and default on their credit cards or other debts instead! (Incidentally, surely the mods are objectively inadequate when this archetype of goodness still redefaults a quarter of the time even while they let their revolving debt go delinquent.)
Later in the piece we also learn that Lois and Eddie are:
low income borrowers who are responsible consumers of debt; they very likely own a modest, below median-priced home, view their mortgage as their primary financial obligation and pay limited interest in other forms of debt, such as credit card and retail card. Property values in their neighborhood have been more stable and not subject to wild speculation and tremendous price increases or decreases.”
So in analysis of mortgage related data we know that someone’s had the same employer for 15 years, has been married for 20, has kids in the school and 9% equity, but we don’t know if their house is below median price? They are responsible consumers of debt because they let their credit and retail cards go delinquent to pay their mortgage? They are responsible borrowers because the bubble didn’t hit their neighborhood?
Without the underlying data it’s hard to be precise about how much Showalter is inventing and what he can footnote, but it’s important to notice that his profile contains factors that aren’t driven by Lois and Eddie, such as the stability of the house prices, and that others, like the responsible nature of defaulting on revolving debt, are a matter of perspective.
Contrast wholesome Lois and Eddie with the can’t-be-helped Vicky and Dave. Vicky and Dave’s first offense is that they are young strivers:
Vicky and Dave are a 20-something, newly married couple, who bought a home in a rapidly developing metro-suburban community where they live largely anonymously, barely knowing the names of their neighbors. They have no children, few friends locally, and no family nearby. They have been with their respective employers less than five years each and live many miles from work, with no coworkers in the neighborhood.
Ok. So they’re newly married, no kids, have relatively new employers. So what? They’re young. More; conventionally we want people to get married before they have kids. If they’re college graduates, maybe it’s their first job after graduating. (And maybe they have student loans too.) If they skipped college, child-labor laws would’ve stopped them from having 15 year work histories with the same employers anyway. Living far from their childhood home? Well, they probably went where the jobs are, a brave decision that economists generally want more Americans to make.
Now, why would they live so far from work? Well, as a young couple, they’re surely at the bottom of the house-buying food chain, and homes with convenient commutes cost more. No friends and coworkers in the area? What’s the data is behind those statements? Still, perhaps Vicky and Dave spend all their time working and commuting. So many of us do, after all. So far nothing much separates Vicky and Dave from the strivers we used to idealize except ominous spin.
But Showalter includes another couple sentences about Vicki and Dave, damning sentences at first glance:
They are more aggressive borrowers with more expensive automobiles bought with borrowed money. They support significantly higher revolving balances and have a penchant to add to their credit portfolio, especially their revolving debt.”
The context to remember is this: regardless of what Vicky and Dave’s accounts are like, Lois and Eddie are insolvent after a mod too. What makes Lois and Eddie special to the bank frame of mind is that they pay the mortgage first and let the other bills slide.
Beyond that, when you commute a long way, it’s important to have a reliable, reasonably comfortable car. What does “more expensive” mean, anyway? A 2008 Ford Taurus or a Lexus? Showalter doesn’t say. Buying a car on borrowed money? Well, that’s how most people do it, and when they do, there’s a lender supposedly assessing their ability to repay the loan.
As to “a penchant to add to their credit portfolio,” I wonder what those credit lines are. How many are store cards like HomeDepot or Lowes, which let you buy 3, 6, 9 or even 12 months same as cash if you’re spending $300 at once? Either is an unsurprising card for young, striving new homeowners. They’re more likely to be DIY types, right? Are the other new lines for stores that sell couches, beds, washing machines or other big-ticket items a young couple in their first house need? Those retailers do time-limited same-as-cash deals too.
In short, I wonder whether the couple is “living large” in the welfare queen way it’s intended, or simply trying to realize the American dream on as affordable terms possible, given the decline in real wages? Showalter doesn’t say.
Later we learn that Vicky and Dave’s cohort:
is composed of borrowers who in the recent past have been very aggressive borrowers across a broad spectrum of debt, well beyond mortgage. [again, what does that mean, specifically?] However they are beginning to fall behind in their debt servicing and are suffering eroding credit and declining cash to service their debt. [Declining cash? Did someone lose a job?]
And then there’s this:
[Vicky and Dave's cohort's] Property values [ ] have incurred more depreciation, with many properties now presenting negative equity. This may account for a portion of this borrower’s recent debt servicing distress, since the borrower is no longer able to harvest home equity to support aggressive consumption habits.
What’s the data point for saying Vicky and Dave were using their equity like a piggy bank? It’s purely a speculative comment–”this MAY account”. I’d like to know what percentage of Vicky and Daves have home equity lines? What percentage of those people were constantly drawing them down before experiencing their current debt servicing problems? How do those numbers compare to the Lois and Eddies? These are not idle questions since negative equity could have a very different impact on Vicky and Dave’s “lifestyle” (i.e. cash allocation decisions).
Perhaps being young and transplants, Vicky and Dave are simply more able to be economically rational, and when forced to choose between the bills, see solving their revolving credit problems as more sensible than paying on a deeply underwater mortgage. That’s particularly true since Vicky and Dave belong to the cohort with the highest negative equity, owing 128% of their home’s value.
But economic rationality in the face of post-mod insolvency is not an acceptable way to understand the situation. Showalter explains:
Here’s the question: Will Lois and Eddie respond similarly to Vicky and Dave, given a bout of mortgage distress? Hardly. That’s the point. And, the other point: The terms of the loan modification are highly unlikely to uproot the lifestyle and financial priorities of Lois and Eddie or of Vicky and Dave. Lifestyle differences trump loan modification terms and will do so all day long. Loan modification terms cannot cause Vicky and Dave to become Lois and Eddie any more than they can cause Lois and Eddie to behave like Vicky and Dave.”
Really? The loan mod terms don’t matter? What if the terms of the loan modification left Vicky and Dave and Lois and Eddie both solvent? I’ll bet both couples pay all their bills at that point. And as I noted Monday, if the bankers (and their allies in D.C., including President Obama) hadn’t denied homeowners the right to restructure their mortgages in bankruptcy, the borrowers would in fact be solvent post-mod. That’s the whole point of the bankruptcy process.
http://www.nakedcapitalism.com/2012/...PjzSd0E8LOj.99
By Abigail Caplovitz Field | December 3, 2012
Friday HousingWire ran a six-and-a-half page big bank/mortgage servicer propaganda piece called “Living Large“, by Tom Showalter. The article, subtitled “A person’s lifestyle plays into whether they will pay their mortgage after a loan modification”, purports to explain why people default on loan modifications. Instead, it spins a bank-exonerating morality play not justified by the data supposedly being interpreted.
I’ll get to the morality play and the “irresponsible borrower” propaganda it represents in my next post to keep this one to readable length. First, to clearly show the wrongness of the bank-serving mythology being sold as its interpretation, I’m going recap the data the ‘article’ presents to answer the questions the underlying study apparently aimed at: why did so many people with mortgage mods made in 2009 default on those mods by 2011? And what needs to be done to make mods more successful going forward?
Note: I can’t assess the data quality because I don’t have access to the underlying tables and sourcing info; I am working off HousingWire’s/Showalter’s analysis of it. I just take his numbers at face value, though as I discuss below, however, something is screwy either in the some of the data or Showalter’s reporting of it.
Regardless, after looking at the data as presented by Showalter, the answer’s clear: People defaulted because the loan mods weren’t steep enough to make them solvent. To get successful mods in the future, payment reduction needs to be enough for borrowers to be solvent again. That’s all. Importantly, a post-mod solvent borrower is what would’ve happened if the loan restructuring were allowed to happen in bankruptcy; we’ve long understood what dealing with debt crises takes.
The Data: Tremendous Financial Stress, Inadequate Modification
So let’s look at the data as described by Showalter. Here’s the setup:
A control group of a random sample of 1 million people with mortgages in 2009, skewed to be a little more than 50% subprime, Alt-A and jumbo prime, was compared to a random sample of 55,000 loans modified in 2009 and tracked through 2011. (Showalter does not say if the modified loan sample is a subset of the control group or not.) The debt loads, bill paying performance and other characteristics of the people in both groups, and of people within the modified group, were compared. In fact, the people in the modified group were broken out into seven different groups, A through G.
So what do we learn about these various groups? The metric most discussed is who was seriously delinquent–60-days or more past due–on credit lines from 2007-2009. This data point is fixated on because, according to the analysis, it is the overwhelmingly strongest predictor of defaulting on a 2009 modification by 2011.
Turns out the baseline borrower–the average borrower in the million person sample of people with mortgages in 2009–was seriously delinquent with 16% (1 in 6) of their “active credit lines” sometime in 2007-09. Think about that: the average borrower with a mortgage in 2009 became seriously delinquent on one or more accounts in 2007-09. That is quite a backdrop of financial stress.
So how do the people who qualified for a mortgage modification compare? Unsurprisingly, mod recipients were even more debt stressed: 30% of their accounts had been seriously delinquent during 2007-09. Mind you, they’re not deadbeats; they were keeping 70% of their accounts current. Still, they were struggling much more than the average mortgage holder.
What about the people who defaulted on their loan mod by 2011? Turns out they were even worse off, having been on average behind on half (51%) of their credit lines during 2007-2009. No surprise there–people with the most debt stress at the start continued to have the most trouble paying their bills. Still, that’s not the whole story.
See, the data show that the tipping point at which “loan modification redefault performance erodes substantially” is serious delinquency on 25% of accounts in 2007-09. But wait–the average for all modified borrowers is 30%! There’s only conclusion possible: the mods were systematically inadequate, unable to address the financial crisis faced by the average person they purported to help.
Redefaulting Data Screwy as Reported
How likely to redefault? Depends on the subtype. At best one in ten redefaulted (11%, subtype F, representing 2% of the sample), and then one in four (26%, subtype G, 3% of the sample). That leaves 95% of the modified borrowers redefaulting at a higher rate, and also signals that the data are screwy, at least as presented by Showalter.
See, he says the average redefault rate was 30%. Group A, which came in at 30% redefault rate, represents 22% of the sample. If 5% of the sample is below the average, and 73% of the sample above, shouldn’t the average be higher? It’s not like the other rates were very close to the average. Subtype C comes in at 34%, D at 37%, and E and B, which combined account for 56% of the loan mods, redefaulted at 41% and 51% respectively. No way that average is 30%; either Showalter or the data are just wrong.
UPDATE: The sentence Showalter writes is “These borrowers…redefaulted at below average rates (average redefault rate <30%).” I read that as meaning the average redefault rate is 30%. Otherwise the 30% is a meaningless, arbitrary number. But considering that a 30% average doesn’t make sense, per the above, and given how incoherent the data presentation was generally, maybe Showalter doesn’t mean the average is 30%. Maybe he picked 30% just because it was the first round number above 26% and 11%, the redefault rates of the groups in question, and the average is in fact higher. Doesn’t really matter.
The Mods Were Inadequate
It’s not just the pre-mod financial stress data that shows mods simply weren’t substantial enough to work. It’s the other data Showalter fixates on, namely what people did with the cash freed up by the mod. Given the “Living Large” headline, I expected to read that redefaulting, ‘bad’ borrowers blew their mod-freed up cash on shopping sprees, decking out their lives with flat screen tv’s, jewelry and vacations. Living Large is about self-indulgent pleasure chasing, isn’t it? But here’s the “lifestyle” choice that Showalter says make some borrowers good, and some bad: whether the borrowers decided to use the cash to pay Peter (the mortgage bill) or Paul (the revolving debt/credit card bill.) Seriously.
Showalter writes:
“the borrowers in the high redefault group applied their discretionary cash to their distressed revolving debt, significantly reducing the proportion that rolled to a more serious level of delinquency. …The low redefault group behaved much differently. By 2011 they were letting their revolving debt role to more than 60 days overdue at a much higher rate.”
Since when is someone “Living Large” by paying down some bills while falling behind again on their mortgage? Snark aside, here’s the key point: both groups–the high redefaulters and low redefaulters–are still insolvent after mortgage modification. They still can’t pay all their bills even though they are trying to.
Showalter talks about high redefaulters paying down distressed revolving debt. He doesn’t claim the high redefaulters rang up large new debts with the cash, just that they chose to pay existing creditors other than the mortgagee.
Mods Should Make Borrowers Solvent
Let’s remember the context for these mods: our nation faced, and faces, a housing and foreclosure crisis triggered by the collapse of a lender-inflated, fraud filled housing and housing-related securities bubble. The crisis has been exacerbated by the unemployment crisis of the Great Recession. Our government stepped in to help, and responded quickly to save the bankers and Wall Street. The big help for Main Street was supposed to be loan modifications/refinancings.
Seen through the lens of public policy aimed at avoiding foreclosure, the inadequacy of the mods is even more obvious. Why did the government let the banks do mods that left people still insolvent?
But wait, banks might say: it’s not fair to put the homeowner debt reduction burden solely on the mortgage; why should our payment be cut so much that the borrower can service all their debts post-mod? Why not force the other debt lines to take a hit too? A variation on this whine is: but wait, by reducing the mortgage payment so much, you’re hurting pension funds and other investors, folk we don’t want to hurt.
Here are my responses:
Dear Bankers:
If you hadn’t falsely inflated principal balances by suborning appraisal fraud and adding fake demand to the marketplace by abandoning underwriting, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t engaged in widespread predatory lending including steering people into more expensive mortgages when they qualified for cheaper ones, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t engaged in predatory servicing, misapplying payments, forcing borrowers to purchase grotesquely priced insurance policies (even when they were maintaining insurance of their own), and charging rolling late and other junk fees, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t worked so hard to kill mortgage-loan restructuring in bankruptcy, which would have led more people into bankruptcy and thus forced other creditors to take a hit too;
If you hadn’t defrauded homebuyers-as-taxpayers by making false mortgage insurance claims;
If you hadn’t defrauded homebuyers-as-pension-fund-participants by lying about mortgage-backed securities to the investing pension funds;
If you hadn’t criminally manufactured documents to foreclose on people’s homes;
It would have been enough to justify you lowering the mortgage payment to make borrowers solvent that you were bailed out with tax dollars and not held accountable for any of your crisis-causing misdeeds.
Dear Investor Protectors:
The issue isn’t whether the mortgage payment should be modified sufficiently to allow borrowers to become solvent. It’s who should pay for that modification. I agree with you: the banks should pay. There’s nothing about modifying the amount of the payment due you that comes out of the borrower’s pocket that requires investors to take the hit for the difference, except investor passivity and comparatively (to the banks) weak political power.
The Bottom Line
Insolvent people will default on debts owed, making the choice that seems most rational to them about whether to pay Peter or Paul. Public policy aimed at keeping people in their homes based on loan mods is a total failure if the loan mods leave borrowers insolvent. And apparently the 2009 loan mods did just that. And that failure is unconscionable against the backdrop of banker wrongdoing and government solicitousness of bankers.
Abigail Field: HousingWire Propaganda Part II – The Irresponsible Borrower Myth, Harry & Louise Style
By Abigail Field, a lawyer and writer. Cross posted from Reality Check
Monday I did an analysis of a study HousingWire reported as showing that profligate borrowers were the reason many 2009 mortgage modifications failed. I analyzed the reported data to show the 2009 mods left borrowers insolvent, and said it’s not surprising that mods that leave borrowers insolvent fail. In the ‘article’, Tom Showalter rejected the idea that mod terms mattered. Instead he claimed the borrowers’ “lifestyles” explained who defaulted and who didn’t.
But here’s the thing. As I explained Monday, the key “lifestyle” choice was which debt to default on: when insolvent, did the borrower pay Peter (the mortgage servicer) or pay Paul (store/credit card debt)? Indeed, the study was a marketing tool trying to sell the ability of a matrix invented by Veritas to identify which potential mod candidates would pay Peter, and which Paul, so the banks could modify loans only for the people who picked Peter. That focus makes the invocation of the irresponsible borrower myth in the article particularly egregious–both borrowers are trying to be responsible in the face of insolvency.
The Morality Tale
Showalter pushes the ‘it’s not the mod terms, it’s the bad borrower’ idea with far more than the “Living Large” headline. He personifies the data by inventing two couples, pitched as archetypes of good and evil, probably hoping to copy the policy-killing success
of Harry and Louise.Showalter’s heroes are subtype G, the 3% of the sample that redefaulted on their mods “only” 26% of the time. He calls them Lois and Eddie, a small town Midwestern couple who’ve been married 20 years, have kids in the local school, work at the mill, and are deeply “entrenched” in their community. They’re not underwater on average, holding 9% equity in their houses. And they’ll do anything to hold onto their houses, because
For Lois and Eddie, their lifestyle–and their values–demand that they save their home. They derive their identity and their purpose from their community. Losing their home would mean losing membership in their community, which is a big part of what makes Lois and Eddie the people they are. A foreclosure would cause Lois and Eddie a great loss-of-face among friends, co-workers and family. Their employers might take note as well.
Later in the piece we also learn that Lois and Eddie are:
low income borrowers who are responsible consumers of debt; they very likely own a modest, below median-priced home, view their mortgage as their primary financial obligation and pay limited interest in other forms of debt, such as credit card and retail card. Property values in their neighborhood have been more stable and not subject to wild speculation and tremendous price increases or decreases.”
Without the underlying data it’s hard to be precise about how much Showalter is inventing and what he can footnote, but it’s important to notice that his profile contains factors that aren’t driven by Lois and Eddie, such as the stability of the house prices, and that others, like the responsible nature of defaulting on revolving debt, are a matter of perspective.
Contrast wholesome Lois and Eddie with the can’t-be-helped Vicky and Dave. Vicky and Dave’s first offense is that they are young strivers:
Vicky and Dave are a 20-something, newly married couple, who bought a home in a rapidly developing metro-suburban community where they live largely anonymously, barely knowing the names of their neighbors. They have no children, few friends locally, and no family nearby. They have been with their respective employers less than five years each and live many miles from work, with no coworkers in the neighborhood.
, maybe it’s their first job after graduating. (And maybe they have student loans too.) If they skipped college, child-labor laws would’ve stopped them from having 15 year work histories with the same employers anyway. Living far from their childhood home? Well, they probably went where the jobs are, a brave decision that economists generally want more Americans to make.Now, why would they live so far from work? Well, as a young couple, they’re surely at the bottom of the house-buying food chain, and homes with convenient commutes cost more. No friends and coworkers in the area? What’s the data is behind those statements? Still, perhaps Vicky and Dave spend all their time working and commuting. So many of us do, after all. So far nothing much separates Vicky and Dave from the strivers we used to idealize except ominous spin.
But Showalter includes another couple sentences about Vicki and Dave, damning sentences at first glance:
They are more aggressive borrowers with more expensive automobiles bought with borrowed money. They support significantly higher revolving balances and have a penchant to add to their credit portfolio, especially their revolving debt.”
The context to remember is this: regardless of what Vicky and Dave’s accounts are like, Lois and Eddie are insolvent after a mod too. What makes Lois and Eddie special to the bank frame of mind is that they pay the mortgage first and let the other bills slide.
Beyond that, when you commute a long way, it’s important to have a reliable, reasonably comfortable car. What does “more expensive” mean, anyway? A 2008 Ford Taurus or a Lexus? Showalter doesn’t say. Buying a car
on borrowed money? Well, that’s how most people do it, and when they do, there’s a lender supposedly assessing their ability to repay the loan.As to “a penchant to add to their credit portfolio,” I wonder what those credit lines are. How many are store cards like HomeDepot or Lowes, which let you buy 3, 6, 9 or even 12 months same as cash if you’re spending $300 at once? Either is an unsurprising card for young, striving new homeowners. They’re more likely to be DIY types, right? Are the other new lines for stores that sell couches, beds, washing machines or other big-ticket items a young couple in their first house need? Those retailers do time-limited same-as-cash deals too.
In short, I wonder whether the couple is “living large” in the welfare queen way it’s intended, or simply trying to realize the American dream on as affordable terms possible, given the decline in real wages? Showalter doesn’t say.
Later we learn that Vicky and Dave’s cohort:
is composed of borrowers who in the recent past have been very aggressive borrowers across a broad spectrum of debt, well beyond mortgage. [again, what does that mean, specifically?] However they are beginning to fall behind in their debt servicing and are suffering eroding credit and declining cash to service their debt. [Declining cash? Did someone lose a job?]
And then there’s this:
[Vicky and Dave's cohort's] Property values [ ] have incurred more depreciation, with many properties now presenting negative equity. This may account for a portion of this borrower’s recent debt servicing distress, since the borrower is no longer able to harvest home equity to support aggressive consumption habits.
Perhaps being young and transplants, Vicky and Dave are simply more able to be economically rational, and when forced to choose between the bills, see solving their revolving credit problems as more sensible than paying on a deeply underwater mortgage. That’s particularly true since Vicky and Dave belong to the cohort with the highest negative equity, owing 128% of their home’s value.
But economic rationality in the face of post-mod insolvency is not an acceptable way to understand the situation. Showalter explains:
Here’s the question: Will Lois and Eddie respond similarly to Vicky and Dave, given a bout of mortgage distress? Hardly. That’s the point. And, the other point: The terms of the loan modification are highly unlikely to uproot the lifestyle and financial priorities of Lois and Eddie or of Vicky and Dave. Lifestyle differences trump loan modification terms and will do so all day long. Loan modification terms cannot cause Vicky and Dave to become Lois and Eddie any more than they can cause Lois and Eddie to behave like Vicky and Dave.”
http://www.nakedcapitalism.com/2012/...PjzSd0E8LOj.99