Warning: People with heart problems, pregnant women, and those with fully developed adult brains and a modicum of common sense are hereby warned that this article may cause high levels of stress and lead to serious mental and emotional problems that can lead one to feelings of despair that may last for extended periods of time and result in the inability to think rationally.

If you were thinking that the top executives at Countrywide, once the nation’s largest mortgage lender and the company that never saw a borrower they couldn’t qualify, had fallen from grace… think again. They’re back with a vengeance and they’re positioning themselves to make a bundle off the housing meltdown. Yes, you read that correctly. Breathe… breathe…

Apparently, they were not quite satisfied with the hundreds of millions they stole… I mean made, so they’ve launched a company that will buy distressed mortgages from banks and the government at a discount, modify the loans so that the borrowers can afford them and then pocket the profits from reselling them.

Want me to go over that again?

The company’s name is PennyMac Mortgage Investment Trust. It’s located in Countrywide’s hometown of Calabasas, California. PennyMac filed papers in late May for a $750 million initial public offering on Wall Street. The company’s founder and CEO is Stanford Kurland, a 27-year veteran of Countrywide. Kurland was Countrywide’s Chief Operating Officer, President, and the heir-apparent to CEO Angelo Mozilo who was recently indicted by the Securities and Exchange Commission (‘”SEC”) on charges of insider trading, among other things. Kurland left Countrywide in 2006, just a few days after cashing in $130 million worth of Countrywide stock. As a matter of fact, eleven of PennyMac’s 14 officers hail from Countrywide. I tried calling PennyMac for an interview or comment, but they said that they had to decline because they are in the quiet period that precedes an initial public offering, as mandated by the (“SEC”).

Want me to go over that again? How are you feeling? You okay? Sure? Alright I’ll go on…

It seems that many in the media have expressed concerns that what the ex-Countrywide execs are doing wouldn’t sit well with many Americans, but frankly I don’t see the problem. What’s the big deal? Hell, I think President Obama should just go ahead and give them the $750 million now… oh wait… actually, when you take into consideration the leverage and the credit default swaps, and the CDOs… let’s call it an even $20 billion and write the damn check right now.

Don’t laugh… I’m not kidding… I’m dead serious here… write the damn check Barack. Write it and sign the Gosh darn check on television, just like you do when you sign a bill that’s becoming the law of the land. Don’t screw around with this. If this is what we’re going to do in this country, then let’s do it publicly and with fan fare. If I’m going to get raped, I want a marching band, you slithering spineless sycophants.

How’s everybody doing? Want to take a little break? Get some air? No? Okay then…

In case you’ve been incarcerated in a foreign land, Countrywide sold itself to Bank of America in January of 2008, but they were back in the news last week because Mozilo, along with the former CFO and former COO, a successor of Kurland by the way, were charged with civil fraud. But they all deny the charges, so it’s probably nothing, and none of the three is involved with PennyMac… you know… depending on your definition of “involved”.

Basically, the architects of the sub-prime lending that caused the greatest financial crisis in the history of mankind, are now going to profit from the crisis they caused by buying and selling the very sub-prime loans they couldn’t sell before, using money raised from selling shares of stock to the public.

Want me to go over that again? Yes? Well, F#@k off.

New York Times columnist Gail Collins wrote: “It’s like Jeffrey Dahmer selling body parts to a clinic.”

Now isn’t that ridiculous? Dahmer selling body parts to a clinic? It’s nothing like that. That would just be gross. This is more like the Nazis committing the atrocities of the Holocaust… twice in a row. The second time with the permission of the world. And then making money selling the body parts to a clinic.

Maybe I should stop. No? Are you sure? Look, I’m just saying… No? Okay… Don’t say I didn’t warn you…

PennyMac’s business model is based on keeping people in their homes, so some consumer advocates offered compliments… and then they bowed past the knee and left the room without turning their backs on America’s royalty. The Times reported that “most banks and investors who own mortgages still seem to find foreclosure preferable to so-called workout solutions, and homeowners continue to report that their pleas for loan modifications fall on deaf ears.” So, PennyMac’s approach will actually benefit struggling homeowners. See, it’s a good thing. Thank God for those guys from Countrywide.

Oh God, I just threw-up in my mouth a little bit. Does anyone have any water?

PennyMac plans to buy the toxic mortgages from the banks at just pennies on the dollar, because apparently the banks will sell the toxic assets to them at pennies on the dollar. Paulson, however, had to pay full price, if you recall. And PennyMac is only buying whole entire mortgages, not mortgages that have been sliced and diced into so many pieces and then made into securities sold to multiple investors. When asked why, in an imaginary interview with PennyMac’s CEO, he said: “What do you think? We’re stupid?”

Look, I think that’s enough… there’s no reason to… really? More? Why? Seriously?

So, PennyMac is actually one of the “good guys”. All they’re trying to do is help make mortgages affordable. Well, shave my head and call me Baldy. Why not. The banks haven’t been able to do it. Two administrations have certainly failed to-date. Here’s how the Times put it:

“That means it wants the apple-pie result of loan modifications to make mortgages affordable – something that banks haven’t pulled off, despite months of prodding from Congress and two administrations.”

And Paul Leonard, director of the California office in Oakland for the Center for Responsible Lending said:

PennyMac’s “model suggests the great promise of an aggressive modification strategy; creating win-win opportunities for borrowers and investors.”

And then he added:

“It’s hard to overlook the fact that these are Countrywide veterans who no doubt contributed to some of the sophisticated schemes to sell bad loans to borrowers and make great profits, who are now finding profitable ways of fixing those loans.”

Is it? Is it hard to overlook that one little hinky thing? I don’t know why? How about one more little thingy that might be hard for some to overlook…

PennyMac has received mega-bucks from BlackRock, the investment manager that, in “no bid” contracts, been paid some $71 million to help the government and banks dispose of toxic assets – such as the mortgages PennyMac “hopes” to buy on the cheap. They “hope” to buy on them cheap? “They hope to”? Why do I think it’s more than just a “hope”? Is “hope” a business strategy? I’ve never heard of a company going public and selling stock because they merely “hope” something will happen. Maybe I’ve just become too skeptical.

Vulture Capitalists

To be fair, PennyMac is not the only company planning to capitalize on the increasingly precipitous drop in housing prices that has created a bona fide engorgement of distressed mortgages and foreclosures. They may, however, be unique in their stated plan to modify the distressed loans in order to “help” homeowners.

The Times quoted Ryan Taylor, a principal at San Francisco’s Cirios Real Estate:

“Their ability to make money is going to be pretty impressive,” he said. “The key to making money in the distressed market is the servicing. The best way to do that is to start from scratch, and that’s what they did; they have former loan officers dealing with distressed borrowers. Servicers who were in place during the real estate boom are more like the Titanic; it takes them forever to shift directions,” so they have not been able to ramp up to do mass loan modifications.

Really? And here I keep hearing that the Obama plan was doing zillions of loan modifications for free. Who knew? So, maybe the whole private sector loan modification strategy isn’t such a bad thing after all. I guess it’s okay as long as the people doing it aren’t “scammers”. See, because it’s the Countrywide and IndyMac guys… it’s okay. Are you starting to get it now?

“They capitalized on the way up, left at the right time, and now are going to capitalize on the way down,” Taylor said. “From the business person’s perspective, you have to say, that’s pretty smart. From a moral, integrity, ethics perspective, it can be questionable.”

Yes, Richard… I suppose from a moral, ethical and integrity perspective it can be a tad “questionable”. That’s one way to put it, anyway. I might phrase it somewhat differently, but that’s just me.

Here’s perhaps the best part of PennyMac’s business plan. PennyMac is a REIT (“real estate investment trust”), which means it doesn’t have to pay federal taxes, because it will pay out its profits to its investors. Woo-hoo! All that and no taxes too? Is this a great country or what? Could it be any better?

According to PennyMac’s Wall Street filing, the new company will be a subsidiary of a company by the name of Private National Mortgage Acceptance Corp., which is owned by Kurland who founded the company a year ago. To start that company Kurland raised $584 million as of March 31, 2009, and has already spent $226 million of that bounty.

In PennyMac’s Wall Street filing we are provided with a window into the insider views of today’s market.

“We believe that there are unique, current market opportunities to acquire distressed mortgage loans and mortgage-related assets at significant discounts to their unpaid principal balances,” the company wrote. “We believe that more than $1 trillion of (residential mortgage) loans are troubled or at significant risk of default in their present state.”

Already, PennyMac has a mammoth deal under its belt. It negotiated a deal to pay the FDIC $43.2 million for $560 million in distressed home loans from the failed First National Bank of Nevada. PennyMac keeps 20-40 percent of every dollar it collects and Uncle Sam gets the rest. Such a deal.

PennyMac’s prospectus does mention that the company’s Countrywide heritage could have a drawback or two… maybe.

“There are several lawsuits pending against Countrywide and certain of its former officers,” the prospectus says, adding that there was a possibility of civil charges against Mozilo.

Gee, is that really “possible”? Why would anyone think that?

Again, from PennyMac’s prospectus:

“Certain of the officers of PennyMac who are former employees of Countrywide, including Stanford L. Kurland, our chairman and chief executive officer, who was chief operating officer of Countrywide until September 2006, have been named as defendants in lawsuits in which Countrywide and other employees and former employees of Countrywide are defendants. … We cannot assure you that existing or future, if any, investigations or litigation will not generate publicity or media attention or adversely impact the company’s ability to conduct business.”

Ah, who cares, right? We’re talking about making big bucks here. Even if Kurland ends up in jail, he’ll probably still be able to run things from inside, I would think. And I would call my Merrill Lynch broker and tell him I want in on the IPO right now, except that he’s working as a teller at a Bank of America in Des Moines.

So, listen up… here’s the play… stop making your mortgage payments so you make your mortgage as toxic an asset as possible. Then just sit back and wait for it to be bought by PennyMac for pennies on the dollar. Then they’ll modify your mortgage so you can keep your home, sell your mortgage back to the investors they bought it from and make a huge profit from the transaction… which in turn will be returned to you as a shareholder in PennyMac!

The bank won’t mind because the Treasury will make them whole on whatever money they lose on your mortgage, and they won’t have to screw around with those annoying loan modifications they hate doing and hardly ever do as a result. And as long as you keep your income under $250k a year, your taxes won’t even go up as a result! And you’ll get free health care to boot!

Hope and change, hope and change… Yahoo! Happy days are here again!

PennyMac… Penny… Oh PennyMac… I’m glad you’re coming back…

PennyMac… Penny… Oh Penny Mac… I must be smoking crack…

Come on, sing it with me…

PennyMac… Penny…. Oh PennyMac… Hubris you do not lack…

Mandelman out.

This article originally ran in December 0f 2009, but I’m reposting it because maybe it will be read by someone who will find it even the least bit interesting.

Training personnel to properly interact with those losing homes to foreclosure is not only the right thing to do… it’s also likely to improve a mortgage servicer’s bottom-line.

Losing a home to foreclosure is something most people never forget. It’s an event likely to stay with you for the rest of your life. It’s certainly not something most people think will happen to them… until it does. And it can happen to anyone at any stage of life, young, old, rich, poor… all can find themselves at risk. As the off-color colloquialism says about life… stuff happens. Although many people might not readily agree, foreclosures are statistically a “there-but-for-the-grace-of-God-go-I” type of situation.

Of course, there are times when more stuff happens to more people, and today is obviously an example of such times. The economic conditions that we’re experiencing today are causing more foreclosures than at any time since the 1930s. When housing prices began to collapse a couple of years back, no one could have seen just how far things would go, and how difficult it would be to bring our economy back to life, as we’ve known it.

One of the causalities of our accelerating economic downturn has been a shared understanding of its cause. Some blame our politicians, some blame Wall Street’s bankers, some blame the Federal Reserve, and we’ve all heard that it was the sub-prime borrowers themselves that are the root cause of our recession.

Belief in a Just World

As human beings, we need to understand the causes behind events that negatively impact our world in order to feel safe. When we don’t understand how or why something happened, when something appears

to have been a truly random occurrence, it frightens us terribly because we can’t plan to protect ourselves from such an event.

Melvin Lerner is a prominent social psychologist. In his 1980 book, “The Belief in a Just World: A Fundamental Delusion,” he argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who are suffering are responsible for their own situations. He conducted a series of experiments and provided empirical evidence showing that after an initial feeling of sympathy, people tend to develop negative views toward others who are suffering. And that’s the type of negative tendency that seems to be in play today.

So, perhaps it shouldn’t be surprising that instead of having sympathy for homeowners that are losing their homes to foreclosure, many people are blaming the homeowners themselves for their predicaments. It’s just an example of the general tendency that was documented by Melvin Lerner and other social psychologists many years ago.

The Sanctity of Contracts

The other factor that comes into play involves the phrase: “sanctity of contracts.” We live in a nation with a capitalist economy that depends on the sanctity of contracts. Our founding fathers put the contract clause into the U.S. Constitution to make clear that people need to live up to the documents they sign. Article I, Section 10 of the U.S. Constitution states: “No state shall pass any law impairing the obligation of contracts.”

So, people have the tendency to view those losing homes to foreclosure as not living up to the contracts they’ve signed. They bit off more than they could chew, is a phrase often heard by those who lack sympathy for borrowers in foreclosure.

How do these factors manifest themselves in human terms? To understand, picture a line of moving trucks extending for hundreds of miles, taking the furniture of countless families to storage lockers. Picture the schoolchildren saying goodbye to their classmates, leaving the comfort and security of their own bedrooms. Picture the parents sitting up late at night looking through bills trying to figure out how they can save their home, or resigning themselves to the fact that they can’t make it. Picture the arguments, the crying, feelings of loss, of failure… picture the moment when all hope is lost.

Picture the day they must leave their home, getting in the car, pulling away from their home, the ones that turn to look back, the ones that force themselves not to look. The radios that aren’t turned on because no one wants to hear music at a time like that. These people you’re picturing aren’t going on vacation, they are being abruptly moved to the other side of town. They won’t have their own yard to play in. They won’t have their patio to relax on as they watch their children run and play. They’re losing their most prized possession… their home.

Yet, it’s also easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. They got themselves into this mess, now they have to pay the price for their own irresponsible actions.

The Price Paid by Children

Some of the hardest-hit victims of foreclosures are children. According to the Center for Responsible Lending, over the last two years: “Over 1.95 million youth have been affected by foreclosure.”

Brenda Jones Harden, Ph.D., wrote that “children exposed to violent, dangerous, and/or highly unstable environments are more likely to experience developmental difficulties.” Children hear more than most parents think they do, so parents’ stress is transferred to their children more than anyone might think.

Oftentimes, the kids come to feel that they are both a financial and emotional burden. They can begin making sacrifices for their families, wanting less, eating less. Some children are forced to quit teams they’re on, or stop taking music lessons simply because their parents cannot afford them. Even young children start taking on weekend jobs to help pay the family’s bills. Vacations are cancelled, and other normal childhood comforts are left by the wayside.

There are other enduring side effects as well. Being uprooted creates instability in a child’s life. They lose friends, teachers, teammates, social circles, perhaps most importantly, confidence. Being forced to change one’s lifestyle is both difficult and stressful for adults. For children, it can be a nightmare.

Children that are displaced by foreclosures often start bringing home lower grades. They exhibit behavior caused by lowered self-esteem. Behavioral issues often become common problems among kids because they feel that they don’t belong in their new setting. Frequently, families that lose their homes can’t afford to move into a neighborhood of equal socio-economic standing. The children can find themselves in new surroundings that may have more crime, inferior school systems, and fewer activities available for youth.

The Great Depression of the 1930s changed a generation. Those that lived through those difficult times altered the way they lived the rest of their lives. What will our nation experience a decade from now as a result of the millions of foreclosures our country continues to experience in these difficult times? No one can know the answer to that question, but it seems clear that there will be some discernable impact on segments of our population, and today’s children are certain to pay a price.

Exhibiting Anger

The crisis we’re experiencing is morphing as it continues, and we can expect continued changes that lead to further problems in our society as the recession lengthens and broadens in scope. One of the factors that’s changing is that the level of anger among foreclosed homeowners certainly appears to be rising, and lenders and mortgage servicers, faced with managing and marketing the volume of foreclosed properties, are increasingly seeing that anger in very tangible terms.

According to the National Association of Realtors, foreclosed properties already make up 45% of home sales, and the number is climbing. Home prices have continued to decline at record pace in 2009, and there are no signs of them stabilizing. Further price declines will undoubtedly result in even more foreclosures. Homeowners remain unable to refinance out of unaffordable adjustable rate mortgages (“ARMs”), and as the market continues its decline, more homeowners, realizing that they have little hope of building equity, will choose to walk away from their properties.

Homeowners losing homes to foreclosure have started advertising their home’s fixtures on Websites like craigslist.com. Some are stripping their home down to its wiring, destroying its plumbing, tearing out entire kitchens, and even removing roofing tiles. Garage doors are disappearing. Built-in cabinets are gone. Even furnaces and air conditioning units are up for sale by homeowners losing their homes to foreclosure.

Recently, the media reported that one homeowner in Monsey, NY, actually leveled his home with a bulldozer just a few days before the property was scheduled to be sold at auction.

Of course, not all homeowners experience that level of anger, or if they do, choose not to exhibit their anger in such extreme ways. But the trends are disturbing. More and more often homeowners are damaging their homes before being forced out as a result of foreclosure.

Communities Suffering

The large number of foreclosed homes on the market today means hundreds of thousands of homes sitting vacant. And vacant homes are magnets for partying teenagers, drug users, vandalism and crime. Broken windows, smashed plaster, huge holes punched in walls, graffiti on walls throughout the homes, debris, and much worse are becoming more commonplace, as more neighborhoods are seeing more foreclosed homes remain on the market for longer periods of time.

Abandoned homes from the foreclosure crisis have a direct impact on the rise in crime in numerous communities. Even when not the result of homeowners or local teenagers, thieves start breaking into these vacant houses, stripping them of valuables, and the destruction of property and vandalism is making the homes even more difficult to sell. Often, as a result, it requires more money to repair these homes than the homes would sell for in today’s market.

According to a recent study by Dan Immergluck of the Georgia Institute of Technology in Atlanta, and Geoff Smith of the Woodstock Institute in Chicago, “when the foreclosure rate increases one percentage point, neighborhood violent crime rises nearly 2.5 percent.” A study conducted in Austin, Texas last year, found that “blocks with unsecured buildings had 3.2 times as many drug calls to police, 1.8 times as many calls reporting theft, and twice the number of calls reporting violence as blocks without vacant buildings.”

According to a paper on the impact of foreclosures, published by NeighborWorks America:

“When homes are abandoned because of foreclosure, entire communities begin to deteriorate. Garbage, un-mowed lawns, pests and dilapidated roofs and porches are eyesores. The lack of care can change the entire atmosphere in a community. The people who remain may have feelings of loneliness, fear and frustration. To make matters worse, potential buyers find conditions like these unattractive, turning them away and cause the empty homes to remain on the market for months and even years.”

Neighbors Pay Too

According to the Center for Responsible Lending, “Foreclosures cost neighbors $223 billion.” The Center also cites that “Over 44 million homes in the United States will experience property devaluation as a result of foreclosures in their neighborhoods. Forty-two counties in the United States can expect to see their property tax base erode by more than $1 billion. And households located in proximity to lost properties could see the value of their property decrease by $5,000, on average.”

According to a story in USA Today, Vallejo, California, once a vibrant and flourishing place to live, recently had to declare bankruptcy when the collapsing housing market caused their local economy to go over the edge. “Vallejo cut 87 jobs and slashed funding for parks, a library, a senior citizens’ center and other public services, but it wasn’t enough to hold off the bankruptcy filing.”

Unfortunately, social programs and public services are often the first things to be cut from municipal budgets, and seeing the irony in this vicious cycle is unavoidable. The programs that are cut first are often the programs that exist to help those suffering from the crisis that caused the cuts in the first place.

Gimme’ Shelter

Of course, the question we should all be asking, with so many people losing homes, is where is everyone moving to? According to the National Coalition for the Homeless:

• 76% of displaced homeowners and renters are moving in with relatives and friends.
• 54% move to emergency shelters at some point.
• 40% are already ending up on the streets.
• 61% of state and local homeless coalitions say they’ve seen a rise in homelessness since the foreclosure crisis began in 2007.

Of course, many homeowners that lose their homes to foreclosure ultimately become renters, and the increasing demand for rentals has, quite predictably, led to rising prices. So, not only do foreclosure victims have a tough time qualifying for rental housing due to their damaged credit scores, but many are being priced out of the market as well.

And that’s not the end of the rental story. Foreclosures are affecting renters too. Many of the foreclosed properties nationwide are apartment unit buildings. According to the Furman Center: “60% of the 15,000 foreclosure filings in New York City last year were on multi-unit buildings.” And the result is families forced out of their apartments often with very little notice. According to the National Low Income Housing Coalition, “In the State of Nevada alone, 5,000 families have been evicted from their rental homes in the last 18 months.”

The coalition also reports that in suburban Los Angeles, a tent city of more than 200 displaced residents has emerged. Notoriously high rent payments in the LA basin are leaving many with no other option than to pitch a tent or live out of their car in settlements like this. At this settlement there is no electricity, no plumbing and no drainage. There is nowhere to properly store food. Clearly, the lack of plumbing and refrigeration poses serious health risks to the residents of this makeshift community.

Homeowners Attitudes About Banks Worsening

Lenders, mortgage servicers, hedge funds, and various real estate investors are all more than aware of the crisis and its ramifications. Yet, distressed homeowners continue to report their frustration and anger over the way they are treated by their bank. And for banks and mortgage servicers wondering about the outcome of this increasing homeowner dissatisfaction… well, the writing is on the wall.

In a November 2008 story, published by the Oakland Tribune (Oakland, California), customers of Countrywide, Wachovia, and Wells Fargo, among others, describe the banks as uncooperative, ineffective and rude.

“Countrywide says it wants to help people restructure? That’s baloney,” said Dawn Aguiar, who bought her Fremont home for $587,000 in 2005. “They have not been helpful at all.” She financed the purchase with a $586,000 mortgage from Countrywide, but homes in her neighborhood now sell for $450,000 to $500,000, so her house is “under water” – worth less than the loan. Her adjustable rate loan balance increases monthly, and she’s behind in her payments.

“One lady I spoke to was so rude, she had a real attitude,” Aguiar said. “She talked down to me like I was a deadbeat.”

The complaints from homeowners at risk of foreclosure about rude treatment by bank personnel are mounting in number and visibility. A quick check online yielded the following:

Mark Gagliardi about Countrywide: “They’re not proactive. No calls, no follow-ups. And when I call them, I get put on ignore.”

Sue Chai Spaulding about Bank of America: “They don’t want to help you. But they shouldn’t take this so lightly. These are people’s lives. They have been rude to me.”

Rachelle Gonzales about American Home Mortgage: “It’s so frustrating. They say they’ll help. Then they say no. They have called me names. They have called me a slime. This has been awful. Just awful.”

On one Website discussion about homeowners losing homes to foreclosure, the following discussion thread was easily found:

The first comment said: “The best way to ruin a house beyond repair is this… Get yourself a couple of bags of cement and mix a lot of water to make it a bit light… Drop it down every open pipe in your house (sink, toilet, bathtub, sewer pipes, main water pipe) then let it set. The repair will cost the bank more than the house… replacing every pipe in the house means they have to redo the house. They might be able to charge you tho… ha, ha.”

To which another replied: “Awww… the poor banks. Whatever will they do? Ain’t karma a bitch?”

And then another added: Yes they could, but, what can they get out of you when you have nothing to lose? Remember kids, fire cleanses everything.

And then another: “Great point. I hate banksters.”

And another: “Payback’s a bitch.”

And then another: “I think this is funny as hell. Everyone getting evicted should take all they want, then burn the place down.”

And another: “The bank may own the house but not the appliances! Of course they should take them – they are theirs. I can find NO sympathy in my heart for bankers or real estate agents – they’re right up there with tax collectors.”

And then another: “If the lender makes things hard, they get to live with the consequences. That house will be torn to shreds.”

And lastly: “If you ask for peace, prepare for war.”

The Cost of Foreclosing

The costs involved in foreclosing on a home are high and getting higher. Lost principal and interest payments, tax and insurance payments, maintaining the property, lost servicing fee income, costs of collection efforts/servicing, legal costs for handling the foreclosure, administrative fees, costs of restoring the property to saleable condition, real estate commissions… all play a role in negatively impacting a lender’s bottom-line.

According to estimates from Standard & Poor’s, published in 2008, the average cost to a lender, expressed as a percentage of the loan balance is 26%. The costs breakdown as follows:

Amount lost in interest payments: 13.6%

Property taxes paid by lender: 3%

Legal fees paid by lender: 1%

Real estate agent commissions: 6%

Home maintenance: 3%

With the housing crisis still in full swing, home prices still not at bottom, and many forecasting millions of foreclosures still to come, it’s clear that lenders will endure more pain over the next few years. What banks and servicers need to consider is how homeowner attitudes are likely to change for the worse as the crisis continues.

Our politicians have recently started to see how populist anger can make governing much more difficult. The outrage over the AIG bonuses provided an example of how close many of our nation’s citizens are to marching in the streets. One can only imagine how homeowners will feel a year or two from now, when many of those who thought they could make it through our economic downturn, find that they have not. No one can know for sure, but one thing seems certain: If they’re getting angry today, they’ll be that much angrier a year from now.

Loan Modifications

As the economy has deteriorated, the number of foreclosures has continued to increase, which places further downward pressure on home values, which in turn causes more foreclosures and does further harm to our economy. Today, we all realize that foreclosures benefit no one, although to-date, we have not united behind a solution to this very serious ongoing problem.

As a result of this dangerous, downward spiral, the cost of foreclosure in some parts of the country is reaching the level at which no one, including the investors that own the property, wants to foreclose.

One alternative is loan modification. If, by modifying the terms of an existing mortgage, the borrower can afford the mortgage payments and therefore remain in the home and avoid foreclosure, it’s often true that everyone, even the investors that hold the mortgage on the property, comes out ahead. For investors, it’s really a question of which alternative, foreclosure or modification, offers the greater financial return. There are several methods for determining the cost differential between the two alternatives, for example one could compare a present value calculation with the expected cost of foreclosure, factoring in variables like repairs and reconditioning, expected time on the market, and assumptions about trends in home prices.

It’s worth considering, however, that lenders and servicers continue to struggle with loan modifications, which are transactions that are particularly time and labor intensive and often produce unsustainable results. As an example, studies published last year indicate that when banks attempt to handle loan modification negotiations directly with a borrower, the end result is that 60% are back in default in six months.

The reasons for this are many, but the overriding fact is that negotiations between a bank and an individual homeowner at risk of foreclosure, are obviously not negotiations between equals, and that manifests itself

in high re-default rates in the first year.

By contracting with qualified and quality loan modification firms, banks may be able to increase the diameter of the pipeline and therefore modify more loans, keeping people in their homes where they’re supposed to be.

Cash for Keys

A number of lenders have adopted the practice of offering to pay a homeowner about to lose a home to foreclosure a cash payment for leaving the home undamaged. Lenders report offering payments of $1500-$3,000. But with the incidence of borrowers damaging their homes before they leave rising, offering three grand may only be keeping the already honest… honest.

For those angry enough to strip wiring out of a home, remove a garage door, or even sell the air conditioning unit, three thousand dollars is not likely to accomplish much.

The Best Way to Catch Flies

Lenders seeking to reduce their costs of foreclosures should consider the old axiom: You catch more flies with honey than you do with vinegar.

As it relates to a lender’s loss mitigation and collection personnel, it means that training them to better understand the psychology of foreclosures, to feel more empathy for those losing homes, to identify with a parent with children in financial distress… and more… banks can expect to be repaid hundreds of times over.

People in foreclosure, and those at risk of going into foreclosure, are often scared, lonely, tired, insecure, and sometimes confused. They’re not thinking clearly and they’re on the edge. A little kindness at a time like that can go a long, long way. A little rudeness, on the other hand, can push someone into a rage. It’s not easy to work with distressed homeowners day after day. And even though some might feel like they’re not letting their true feelings come through, at times like these, that can be difficult, if not impossible to do.

Here are some ideas that I think bank management could consider to change the way their personnel behave toward distressed borrowers.

1. Explain what distressed borrowers are thinking and how they are feeling. Give them the details. Ask them to imagine what they would do and how they would feel. By bringing them into this kind of discussion, you’ll force people to realize that others worry about the same things they do, and once they share their thoughts and feelings with co-workers, they’ll stop seeing those in trouble as getting what they deserve.
2. Share the facts about the costs that neighborhoods, communities and society as a whole pay as a result of foreclosures. You can use some of the statistics presented earlier. People sometimes fail to see how something that hasn’t happened to them personally, affects everyone personally.
3. Play the Foreclosure Game – Ask people to calculate what would have to happen to place them at risk of losing their homes to foreclosure. You can even create cards that describe various catastrophes that happen to people in life. For example: You are injured in a car accident that leaves you unable to work for three months; the driver that hit you is uninsured. A month later your spouse is laid off from work, and you have a tuition payment of $18,000 due in 90 days. You can’t take out an equity line on your home, nor can you borrow from the bank. And your retirement plan account has been reduced by 40% as a result of the latest market correction.
4. Consider asking a borrower who already lost his or her home to foreclosure to come in as a guest speaker. Often times, it’s harder to harbor ill feelings about someone you’ve met face-to-face, and the personnel stories from people who have come through it, can have a lot of impact.
5. Conduct role-playing exercises in which one person is the borrower and the other the bank manager. The borrower starts by explaining to the bank manager how they got in so much trouble. The rest of the group votes on the level of empathy and compassion the bank manager has communicated during the call.
6. Review your personnel training manuals to ensure that they are not placing counterproductive restrictions or using guidelines that make it more difficult for your people to spend the time needed. For example, do your people try to spend less than a certain amount of time per call? If the answer is yes, you may want to consider either lifting that requirement, or lengthening it.
7. Changing culture has to start at the top. Have all of your organization’s top managers speak at your training sessions. When your loss mitigation personnel hear the CEO talk about foreclosure victims with sympathy and caring… they’ll stop and listen.
8. Clip and distribute articles that highlight the heartbreaking stories of people losing homes due to no fault of their own. Many people today, still have the impression that those that got in trouble did it to themselves. Show data on the number of prime loans that are now defaulting. Examples that destroy that perception help to open minds.
9. Encourage your people to share stories with each other at regular meetings. This is not something you want to do just once and leave it alone after that. This is an ongoing program intended to make sure that the people you have on the phone aren’t causing someone to punch holes in their walls when they hang up from the call.
10. Consider increasing the number of breaks your people take during the day. And consider providing some items “just for fun” in areas where breaks are taken. An Etch-a-Sketch, Slinky, or even Play-Doh, can all bring back happy memories and help to relieve stress, or on the more serious side, provide an exercise ball, weights, or even a treadmill or two… exercise kills stress.

Conclusion

Human beings have a need to see bad things that happen to someone as not being their problem. And because of how this crisis has unfolded, many people have come to believe that everyone losing a home is an “irresponsible sub-prime borrower”. This belief can color how someone interacts with a distressed homeowner.

Those losing homes today are going through very stressful times. Many have lost jobs, and are struggling to make ends meet. Many have young children. And many have lost all hope. It’s easy for someone under that kind of stress to become angry, and an angry homeowner losing a home to foreclosure is likely to damage the home before leaving.

Banks and servicers need to take a look at how loss mitigation personnel are trained to deal with homeowners at risk of foreclosure, because as the months and even years go by, the situation will only get worse. By helping personnel to better understand what’s happening and how these customers are feeling, they can spend a little extra time, or offer a kind word that can make the difference between a home left in decent condition, and one in need of thousands of dollars in repairs.

Most importantly, communicate with the people that interact with troubled borrowers on the phone every day. It’s a hard job and constant exposure to tragic situations and frustrated or angry customers can wear one down, even if the person doesn’t realize it.

Today, just like my mother used to say… It pays to be nice.

Mandelman out.

Who’s the moron in the Obama Administration? Someone needs to find out and let me know so I can name names, because the monumentally tragic absurdity known as the Making Home Affordable program, or the Home Affordable Modification Program, or any of the other wonky acronyms this administration has come up with, just went from ill-conceived to stupid. It jumped the shark, in a manner of speaking.

This past week, the administration announced, again with much fanfare, that they would be announcing some fabulous improvements to the absolute failure that is HAMP, the government’s answer to the ongoing foreclosure crisis that continues to fuel the freefall in housing prices that assures our recession’s future.

So, once again I waited to see what the smartest guys in the room would come up with, again feeling like Charlie Brown eyeing that football, and thinking to myself: If you pull that thing away at the last moment again… Lucy, you got some ‘splainin’ to do. (When I think things to myself, I often sound like Desi Arnaz in my head.)

So, they made the announcement and I wrote an article about it and I tried hard not to be a unqualified naysayer. I don’t like bashing the Obama Administration all the time. I’m even willing to wait longer to see my doctor or pay a tax on my health insurance if they’ll just stop the bloodletting in the housing market before it turns Somalia into a better place to own a home than Southern California. That’s not unreasonable, is it?

But they did it again, damn it. The Harvard contingent that’s packed in like sardines in this administration once again demonstrated that they have no idea what they’re doing when it comes to the foreclosure crisis. Their best idea to-date, no actually their only idea to-date, is to continually release questionable-at-best, manipulated economic data to tell us that the recession is over, as we struggle to stay afloat hoping to not be laid off, and wondering how much we could save each month by growing our own tomatoes after our bankruptcy has been discharged.

Well, there’s that and the giving of trillions to the banksters in one form or another.

The “new and improved” HAMP advertised “principal reductions” and “more help for the unemployed,” as it relates to loan modifications, which made for a fabulous sound bite, and predictably led the tribe of sycophant journalists to write about how the new plan would help stop more people from falling into the abyss.

So, here it is Saturday morning. I got up, poured my coffee and sat down to read the language of the new HAMP more carefully, and now all I want to do is beat someone or something with a baseball bat… or go take a nap. Because, I have to tell you… I’m getting real tired of stupid, and this is really stupid.

The new and improved HAMP caused Moody’s Economy.com to release revised forecasts for the new plan, saying that it could prevent nearly 1.5 million foreclosures from now through 2012, compared with an estimated 650,000 forecasted under the old plan.

Am I the only one that finds that hysterical, in addition to being interminably sad, of course? I mean, none of the forecasts for the old HAMP have come anywhere near close to accurate, so now Moody’s releases forecasts based on those hippy-dippy numbers? And that’s not funny? In addition to being stupid, of course? I‘m sorry, but I’m laughing my ass off over here.

So, here’s what the new and improved HAMP will… and more importantly will not do for homeowners:

1. Help for the Unemployed – For distressed homeowners receiving unemployment benefits at the time they apply for a loan modification under HAMP, lenders are now supposed to lower their payments to no more than 31% of their gross income for three months… as long as the homeowner is not more than 90 days in arrears at that time.

Then, as if it mattered one iota, the unpaid amounts are to be added to the loan’s principal so they can be defaulted on… I mean repaid… at a later date.

It appears that the administration is hoping that three months later the unemployed homeowner will have found gainful employment and therefore will qualify for a normal HAMP loan modification in which payments will stay at some reduced amount. Of course, if the borrower doesn’t manage to find a new job in 90 days… and not just a new job mind you, but one that adequately replaces his or her lost income… we’re not talking “would you like fries with that”… well, then it’s foreclosure time at the family ranch once again.

Okay, everybody stop. Whose idea was this? Find him… test him to make sure he’s not mentally challenged due to a metal plate in his head or by some sort of birth defect… and assuming that’s not the case, punish him severely and publicly in order to dissuade others from engaging in this level of thinking in the future. Clearly, we need to raise the bar here, and allowing this sort of thing to slip by as being in any way acceptable for adults will only perpetuate a race to the bottom in the idea generation department. Next thing you know you’ll be taxing health insurance benefits… oh wait… never mind, bad example.

Let’s look at this component of the new plan…

First of all… and the administration knows this all too well… we have a record number of people in this country that are unemployed for more than 26 weeks, a near record number of part-time workers for economic reasons, and a decline in average hourly wages across the board. And that’s according to the government’s own most recent report.

So, let’s see… how many weeks in three months? Hmmm… carry the 7… divide by 9… I don’t know… shall we call it 12? I wonder how many of the unemployed homeowners applying for a loan modification will replace their income to the level required in 12 weeks or less? And since lenders and mortgage servicers won’t even talk to anyone about a loan modification until they’re 60 days delinquent, and the new plan only applies to homeowners that are less than 90 days delinquent… so that leaves what… a thirty-day window?

The administration’s new plan will only apply to unemployed homeowners in that 30-day window?  Seriously?  And then they’ll get a lower payment for 90 days and unless they find a new job that replaces their old one in that time, they’re back to foreclosure? Wonderful, that just sounds positively wonderful.  Crackerjack work, wouldn’t you say?

Oh, and even in the best case scenario, the amounts that go unpaid get tacked onto the loan anyway? And just when do those get repaid? Come on… this is characterized as providing extra help for unemployed homeowners?  Really?

This is extra help, like a Dr. Scholl’s footpad helps 40 years of wandering in the desert.

2. Consider Principal Reductions for Underwater Homeowners – For homeowners behind in their payments and considered “deeply underwater,” the new and improved HAMP will “require lenders and servicers that decide to participate to consider” providing a reduction in the principal balances of mortgages. They will also be “encouraged” to reduce principal balances for underwater homeowners who are current on their payments.

First of all, the word “consider” comes from the Latin word “considerare,” which means: “to look at closely, observe”. And the word “considerate” means: “marked by deliberation, of persons deliberate and prudent, and circa 1700, meaning “showing consideration for others”.

So, before I say anything else, I’d like to propose that we pass a new law immediately that prohibits the use of either word in conjunction with anything having to do with banks. All those in favor? Yep, I thought so.

Getting back to the specific issues at hand… weren’t the banks already required to “consider” principal reductions in conjunction with granting loan modifications under the HAMP guidelines. Oh yes they were… or rather are. Look up the HAMP guidelines, you’ll see.

So what’s the deal now? Are the banks now being double-dared to consider writing down the loans?  Are they being told to think on it extra hard.

Why in the world, and especially at this stage of this tragedy, would our government even CONSIDER writing language like this into an already failed plan that’s continuing to publicly pull our nation’s economy towards an extended state of financial ruin?

And don’t even talk to me about banks being “encouraged” to write down mortgages for homeowners who are not delinquent on their mortgage payments, because not only do I not believe this will ever happen to any meaningful degree if at all, but I find the entire idea utterly preposterous. If you want to help those who are not (yet) delinquent on their mortgage payments, how about doing something to stop their neighbor’s home from being auctioned off at 60% of it’s market price. That might help, what do you think?

We certainly don’t need Bank of America devoting any of its obviously scarce resources to calling homeowners who aren’t delinquent and saying: “Hi, yes I’m calling from Bank of America. I realize you’re not delinquent on your mortgage payments, so we thought we’d give you a call and see if we can’t write down the principal balance for you.”

And all of this assumes that lenders and servicers will decide to participate in the first place, because like every other government program to-date, it’s all voluntary. The banks don’t have to do diddlysquat. And, as The New York Times pointed out in its editorial discussing the changes to HAMP:

“… lenders might wait to see if bigger incentives are offered later. They may also prefer foreclosure to modifications because the long foreclosure process lets them postpone taking losses.”

Both points are of course true, assuming that any lender’s internal discussions on the subject would even rise to the level at which either point might become relevant.

The administration must do more. They owe these homeowners… and the American people more.

There are quite a few people out there that feel that homeowners unable to make their mortgage payment deserve nothing more than foreclosure. Their thinking, in most instances, is that these homeowners have brought this on themselves and now it’s time to pay the proverbial piper. Their bad decisions have consequences and the government has no business “bailing them out”. Yada, yada, yada.

I could not disagree more with this perspective and it’s important for me to state precisely why I think the way I do.

A. This is not 2006, 2007, 2008 or even 2009. This is 2010. The government has had several years and two administrations to do something about our downward spiral in the housing market and it has unquestionably failed at every single turn. Meanwhile, our government has bailed out the Wall Street banksters whose actions were the proximate cause of the crisis. It wasn’t today’s homeowners who thought housing prices would go up forever, and as a result leveraged themselves 40:1, it was the bankers who thought that way and did just that as a result.

B. Sub-prime loans are not the issue, and haven’t been for well over a year, maybe two. Today, more than half of the foreclosures are prime loans, so it’s not about people who shouldn’t have qualified for buying their home. People losing their home today have simply been caught up in the deflationary collapse that’s been allowed to go on almost unchecked for far too long.

C. Had the government stepped in sooner and more effectively, and there were plenty of opportunities for it to do so, we wouldn’t have (U3) unemployment hovering around 10% with no relief in sight, so many of these homeowners wouldn’t be unemployed and losing their home as a result. (U6 unemployment, the real unemployment number, is still north of 17%)

D. Had the government stepped in sooner and more effectively… and had the banks not shattered the credit markets by pushing AAA rated mortgage backed securities whose value was questionable at best… housing prices wouldn’t have fallen as far as they have and therefore many more people would be able to refinance as their loans adjust higher instead of the situation in which we find ourselves today.

E. The government’s failure to more effectively address the housing crisis has caused values to fall to the point where every homeowner in America has sustained enormous losses, to the point where even the most prudent of plans have gone awry. Retirements are being postponed, and all Americans are paying the price. Taking effective measures at this point to stop the carnage in the housing markets doesn’t represent a special interest bailout of irresponsible homeowners, it represents the only responsible path the government can possibly take to assure the future prosperity of its citizens and nation as a whole.

Hopefully, that made my position sufficiently clear.

This new and improved HAMP for the unemployed is not going to help 1.5 million homeowners instead of 650,000, as forecasted by Moody’s. In fact, with HAMP itself still languishing somewhere between total failure and abysmal failure,  in terms of its ability to help homeowners who are not unemployed, I’d be surprised if it helps anyone at all.

And the idea that anyone could possibly peg their hopes on banks “considering” anything, or acting in anyone’s best interests but their own, based on any level of encouragement, first makes me laugh… and then pity those willing to do so.

The entire idea is absurd, and whoever is responsible for authoring such enhancements to the HAMP program, deserves to be publicly ridiculed. They are obviously people whose intelligence is lacking to such a degree that they should not be allowed to drive a car, or even cross busy streets without assistance.

Here’s a thought… Perhaps the whole thing is just part of Obama’s plan to stop immigrants from coming into this country illegally by allowing the United States to become a nation whose economy provides less opportunity for prosperity than Mexico. ‘Cause you know… that just might work.

If that’s the case, however, then I’d like to reverse my position on the whole “build a fence” idea. Capisce?

Mandelman out.

Ergo bibamus.