“Through this week, IndyMac Federal [the bank that FDIC took over last summer] has mailed more than 15,000 loan modification proposals to borrowers, and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures. While it is still early in our implementation of the program, over 3,500 borrowers have accepted the offers and many more are being processed. We are still working to verify incomes, but thousands of borrowers are already making their modified payments. I am pleased to report that these efforts have prevented many foreclosures that would have been costly to the FDIC and to investors. This has been done while providing long-term sustainable mortgage payments to borrowers who were seriously delinquent. On average, the modifications have cut each borrower’s monthly payment by more than $380.”
It is instructive to convert this innocuous US$380 into more meaningful numbers. For ease, all figures are given in US dollars.
To simplify the computations we shall assume that June 2005 is a reasonable proxy for the entire distressed portion of the IndyMac bank loan portfolio. We shall further assume that most of the loans were given for properties in California and will use this as a geographic proxy. Our final assumption will be to restrict ourselves to fixed, 30-year mortgages. The median price of a home in California in June 2005 was approximately $542,720 (source: California Association of Realtors). Assuming an annual interest rate of 5.6% (the national average in June 2005), we have a monthly payment of $3,115.64 (online mortgage calculator). (This does NOT include property taxes or Mello-Roos supplemental local California taxes, so the numbers presented in this post are conservative. Because the FDIC renegotiations of IndyMac mortgages carry commensurate reductions in property taxes, it means that California receives commensurately smaller revenues. But this is a topic for another post.)
More precisely, a -$383.02 per-month mortgage payment modification corresponds to a reduced loan having $476,000 in principal, with 5.6% interest over 30 years. This is a $66,720 mortgage reduction in today’s dollars, on average, for each mortgage in our hypothetical IndyMac loan portfolio. Over the life of the loan, this represents a $137,887.20 decrease in total mortgage payments.
To put things in greater perspective, a $476,000 mortgage corresponds to the median home price in California in late 2004. Effectively, people who could not afford homes at the June 2005 levels -- but bought anyway -- are having their mortgage principal back-dated approximately 9 months. Responsible persons buying homes in June 2005 are being offered no such deal. Unfair? You betcha.
The argument has been made that the problems facing our financial system are so severe, that to allow people to continue to default on their home loans would have catastrophic consequences. I understand this argument, but I am still angry. The government regulators, banks, and home buyers appear to want to “have their cake and eat it too” – a fault-free solution where no one suffers. What about the people who have been disciplined and not bought anything? What about the people who bought, knowing they could make the payments?
If a $66,720 (or $137,887.20 depending on how you want to look at it) tax-payer and bank-funded reward is being given to persons not capable of making their monthly payments, perhaps the banks and tax-payers should include everyone else in the largesse. Firstly, we need to impose strict regulations on banks combined with beefed-up armies of regulators to look over their shoulders. Secondly, give me a check for $50,000 and we’ll call it square.
More responsibly: Let the system that got us here feel its own pain. It's the best teacher of all.
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