The Coming Mortgage Class War

My dad gets angry every time he hears about a potential mortgage bailout. Frankly, he should. He's maintained perfect credit his entire life. He's always lived within his means. The idea that someone more irresponsible than him would be provided with some sort of a lifetime specifically because they were irresponsible bothers him to the core. What my dad doesn't even realize is just how good a deal some of these folks will get.

Yesterday, the Federal Government announced that the Fannie Mae/Freddie Mac would soon begin to modify loans en mass of borrowers struggling to make their payments, but some folks think this plan doesn't go far enough.

“It’s definitely a step forward,” says Howard Glaser, a mortgage industry consultant and a U.S. Department of Housing and Urban Development official during the Clinton administration. “They do have several hundred thousand eligible loans, and Fannie and Freddie are likely to be better than the private industry has been in applying modifications across the board because they don’t have the shareholder issue to deal with.”

But there are limiting factors, Glaser says. “Fannie and Freddie’s share of high risk mortgages is very small compared to the market as a whole. And as you get into 2005 and 2006, sixty five percent the mortgages were done in securitizations outside Fannie and Freddie--and that’s where most of the trouble is.”

Indeed, James Lockhart--Fannie and Freddie’s regulator--said in a speech announcing the program that “private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies.”

And that’s where the plan falls short, says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School of Business. The program does no apply to loans in most private label mortgage-backed securities. Instead, Lockhart is asking investors and servicers of such securities to do so voluntarily. “I ask the private label MBS [mortgage-backed securities] servicers and investors to rapidly adopt this program as the industry standard,” Lockhart said.

But simply asking them to do so is not enough, Wachter says. The private sector has
demonstrated that it is “unwilling or unable” to voluntary modify loans in significant numbers since the onset of the crisis, she says. “There’s hope here, but its moral suasion,” Wachter says. “And we don’t have a lot of time to see if moral suasion works.”

I believe this idea of mass loan modifications will soon produce one of the most corrosive class wars in the history of this country. Loan modification is the process by which a distressed borrower gets new loan terms not based on their merit but based on their ability to pay. Either or both, the loan amount and the interest rate are adjusted so that the new payment is now something the borrower can handle. Because loan modifications are available to those based on ability to pay not credit worthiness, this is a process that someone with perfect credit like my dad would not qualify for. That's because those with perfect credit are perfectly capable of paying the loan terms they AGREED TO WHEN THEY GOT THEIR LOAN.

Yesterday, I mentioned a loan modification I recently saw. This particular borrower got a interest rate of 4% for the next five years. That rate would go to 6% for the next two years after that, and then it would go to 6.75% for the rest of the loan. That's not a bad deal considering this borrower only got said deal by not being able to pay their current loan.

What do you think will happen when word gets out just how good a deal some of these modifications are? What will happen when borrowers with good credit find out those with bad credit are having not only their interest rates reduced but their loan amounts as well? What do you think will happen when the borrowers with perfect credit realize that it is their own credit worthiness that holds them back from getting the exact same deal?

We will have a class war the likes of which we've never seen. Those that acted responsibly won't merely be jealous and envious, but rather they will be outraged. This will pit neighbor against neighbor, friend against friend, and colleague against colleague. Those with good credit will demand action. They will demand justice and they will demand accountability. I have always believed that there is a silent majority in this mortgage mess. That majority are the folks that have paid their bills on time. For the most part, they want no one bailed out. They were responsible. Others weren't and they won't stand for those that were irresponsibly being rewarded.

The process of loan modifications is just entering the public consciousnesses. Once the public at large understands just what all of this means, there will be a revolt from those that don't "qualify" for loan modifications. Those that have been responsible have been overlooked by this entire process. Those that have acted irresponsibly have been catered to and turned into victims. In my opinion, turning them into victims has always been a source outrage as exhibited by my dad. This sentiment is out there however the MSM has buried it. Just look for a sob story about some family that lost their home. See if there are comments and read the comments. Almost always the bulk of the comments come from people that feel the situation was their own fault.

The dirty little secret of loan modifications is about to come out. Once it does, that secret will start a class war the likes of which we have not seen in a long time.