June 25, 2012

Unemployment and the Underwater Homeowners

By Bruce Krasting

A good portion of the unemployment problem that America faces is structural. Bernanke can Twist all he wants. His maturity extension plan averages $2b of short-term versus long-term paper swaps a day. That is not even a rounding number in the Treasury/Agency fixed income market. Other than adding to the bonus pool at a few of Wall Street’s wire houses, it will make no difference at all.


There are a fair number of people who are now out of work (or underemployed) who can’t seek a job outside of their current location because they are underwater on their homes. Without mortgage relief, they are trapped.

Take the example of the welder in Cleveland who can’t take a promising new job in Nebraska because he is upside down on his mortgage. Assume that this welder has a contract of employment in his hand from an employer desperately looking for workers in the oil fields. All this person has to do to start over is to settle the mortgage in Cleveland. Note: This is a realistic example.

It’s not possible to create a new blanket law that fairly grants mortgage relief for people looking to move and have secured employment elsewhere. However, there are many potential opportunities for mortgage forbearance that already exist. What is needed is a very big stick to hold over the mortgage servicing banks to complete the process.

The “stick” I refer to would have to very threatening indeed. It would have to come from the highest regulatory authorities in the country. It would have to have real teeth in it. It might read like the following (plain language):


From:

Board of Governors of the Federal Reserve System
Consumer Financial Protection Bureau
Federal Deposit Insurance Corporation
National Credit Union Administration
Office of the Comptroller of the Currency

To:

All Banks and Mortgage Servicers

As of today there is a new deal. 

If a mortgagor approaches you with a request for mortgage forbearance AND this person has proof of employment outside of his/her current location we are telling you to resolve the problem ASAP.

Mortgage servicers have a variety of tools at their disposal to address underwater borrowers. These options include the Making Home Affordable Program and programs offered by or through Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture-Rural Development (USDA-RD). Use these programs to mitigate loss.

Banks and investors may take losses as a result of this order. We don’t care. If the borrower has a liquid net worth under $25,000 we’re telling you to eat the loss.

If the borrower seeking relief has a second mortgage or HELOC, write it off. Don’t you dare deny a borrower forbearance on a second lien. We will eat you alive if you try.

You have 15 business days to wrap this up. No delays will be permitted. If you delay the process, and the individual loses the job offer, we will hold you liable. We have lawyers itching to bust one of you.

If you do reject a request for mortgage relief from an individual who has a job in another location, you have to report the details to us, and you must explain why you did not play ball.
We will be looking at this with a fine-toothed comb. The first ten of you that we catch screwing this up are going to get the book thrown at you. We will make your life miserable. We will sue you. We will fine you. We will take away your license to operate.

If you screw with this order, we will screw with you. We don’t care how big you are. We will take you down. We have the power and we will use it.

Okay. Do you like it? I hope you do. I had fun writing it. Please don’t think that I had anything to do with coming up with this idea or the use of a regulatory threat to achieve the desired results. I just copied it, (in spirit) nearly word for word, from the same government Agencies that I mentioned above . It was released today. Here’s the cover page and the LINK:


.

If you’re in the military with an underwater mortgage, and you have transfer orders, those government agencies have basically said “Deal with it!” – “Pronto”.

Of course lawyers wrote up the memo from those Agencies. They did however make it pretty clear that they meant business with:

If the Agencies determine that a servicer has engaged in any acts or practices that are unfair, deceptive, or abusive, or that otherwise violate Federal consumer financial laws and regulations, the Agencies will take appropriate supervisory and enforcement actions to address violations and seek all appropriate corrective actions.

That is as close as lawyers get to saying, "If you screw with us, we will screw with you".

I'm 100% in favor of the proposal put out by the big agencies that protects folks who are in the military and who have to move. My complaint is that this offer of relief is not made available to a larger segment of the population.

It’s way past time for loss recognition. People have to restart their lives. Banks and government lenders have to recognize losses. The government finally came up with a good idea. One that would address the critical issues of unemployment and underwater homeowners.

Too bad D.C. only saw fit to offer it to their own employees. Go figure.


About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting(EconMatters author archive here.)


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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