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Monday, December 15, 2008

The Irony of Me, Barack Obama, Regulations, and Loan Modifications

Barack Obama is in love with regulations and especially mortgage regulations. I hate regulations, however I would regulate loan modfications. Loan modification is the process by which banks re negotiated loans for borrowers that are struggling to make their mortgage payments. The banks create loan terms that are more affordable to the borrower. The one loan modification I saw gave the borrower a 4% rate for 5 years, 6% for two years after than, and then 6.75% for the remainder. That, ironically enough, is something that Barack Obama would not regulate. In fact he would encourage more of it. In an Obama administration anything that encourages loan modifications is something he would support. That's because the federal government is desperate to curb the tide of foreclosures. Anything that is viewed as slowing this down is something his administration would support.

Even more ironic is that without serious regulations loan modifications will be a reign of terror in this industry. Let me put into perspective just how corrossive this practice may become with a mortgage situation I heard about. There was a borrower that had two properties. One isn't even on their credit report because it had been passed down. The borrower also owned a two unit. The broker saw an opportunity to cash out of the home, and then it was suggested that the other be put into a loan modification program. There is really no very good reason to put the loan into modification however the borrower was recently late and one of their loans is about to adjust up and that is often enough. Keep in mind that loan modifications are supposed to be done only for those folks that are in serious trouble and need a lifeline to avoid bankruptcy. Now, I have no idea if this could be done, but it will be tried. Soon all sorts of scenarios will be tried and without regulation many of them will succeed. This is the future of loan modifications without regulations.

It is, however, likely we will see all sorts of new rules like no stated loans unless you put 20% down or some such number. None of the government created regulations will make an ounce of difference since the market has long ago created its own regulations far superior and strict than anything the government could impose. There is frankly almost no stated loans left in the industry period. No money down has disappeared entirely. I don't think there is any doubt that by 2011 we will likely be signing many more documents than we are now.

Yet, while he is creating all of these new regulations, he will be unleashing a reign of terror on the market by unfettered and encouraged loan modifications. What I see in loan modifications is the reincarnation of the sub prime mentality. There was no scenario in sub prime that couldn't get a loan. The same thing will happen here. Soon enough everyone will manipulate the system until everyone gets it, and since it will be insured by the FDIC, none of the players will care much that everyone is getting away with murder.

There is a great deal of irony in someone creating a plethora of new regulations in an industry and not getting the one niche they should get. As a result, while all of the regulations he did create won't do anything but make it harder to conduct business, the one set of regulations he doesn't commit will be the disaster he will soon have to deal with.


mortgage loan modification said...

I agree that the government is too forgiving, but sometime speople just need help; and it's more productive to the economy as a whole to get them out of debt so they can become more productive workers in the future. There's definately benefits to loan modification, and if people had a road bump in their lives, they deserve some help every now and then. What if it's their home and they will lose it? We can't just throw people out on the streets. Mortgage modification benefits with regulation.

mike volpe said...

every now and then maybe, however when loan modifications become an industry, as it is now, the process is no longer every now and then.