Tuesday, October 23, 2007

Lemons into Lending Aid

The house of cards that has been the credit collapse is giving way to a number of “work-outs,” causing some to wonder whether anyone has learned the lesson (uh, people who live in glass houses should be able to afford Windex?)

Both government and private consortiums are collaborating to provide concessions on everything from interest rates to tax credits. You're not along if you're wondering what such shenanigans are going to cost the rest of us.

The answer depends upon whom you ask.

The notion that tax dollars might be tapped to bailout soured mortgages is not farfetched.

Money that might be appropriated for a pet pork project or the next FEMA giveaway would be absent if diverted instead to keeping a family in a home they probably should not have purchased, had more stringent (translation: prudent) lending guidelines been followed.

I speak from experience, screening loan applications, working up mortgage packages, and at the other end of the spectrum, assessing REO’s for lenders left holding the bag when a home owner decided to get out of Dodge, and out of the house.

People walk away from their houses when they reach the point of no return: too far behind on payments too high to keep up when life intervenes. Divorce, job loss, death in the family…or the perception that there’s no reason to stay in the house when there’s no skin in the game. In other words, a purchase that’s sealed with a no-money- down deal is mighty thin veneer when personal economics start to get rough.

Personally, I have a problem with the Federales riding in to rescue lenders that threw caution to the wind, and cranked out skanky loan after loan, and are now singing the “I got the repo inventory blues” on Wall Street.

However, there is a pragmatic aspect of this scenario that cannot be ignored: eventually, we’re all going to foot the bill for this one way or the other, so perhaps the path of least resistance (or minimal pain) is to do what it takes to resolve the consequences sooner than later.

Countrywide Financial has already thought this through. They’re not waiting for the Government’s version of fiscal largesse to cushion their fall, pledging to “modify” $16-billion worth of “questionable” loans in its portfolio. While that figure represents about 82,000 mortgages, in comparison to the loans originated by Countrywide, the slice is only 7% of their production in the first six months of this year.

Countrywide stock fell 4% in response to the announcement.
A knee jerk reaction by some could spell opportunity for others.
Go figure—if Countrywide is recognizing and addressing the problem now, it’s probably going to be among the first lenders to emerge at the other end of the pipe with its business intact.
Hey, I’m not recommending stocks here, but I do know when something’s on sale.

Meanwhile in Washington, D.C. the spinmeisters are doing what they do best—trying to control the spin. There’s legislation afoot to alter the Bankruptcy Code to allow a reduction in a mortgage to the actual value of the home if you file Chapter 13 (remember, the Banking Lobby were staunch disciples of the harsher terms in the recent Bankruptcy reform.)

Guess they figured that pill was too bitter to swallow, now that it’s come back to haunt them.
Solution: relax the rules…a practice that got some lenders into trouble in the first place.

That’s one of many plans afoot.
Countrywide is wisely not waiting around.
In a world where wanting a job done right means doing it yourself, Countrywide is setting a refreshing example.
They really had no choice.

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