Yves Smith on Proposed Settlement on Mortgage Modification with Banks

link here to video

Yves Smith was recognized as having one of the 25 best financial blogs by Time magazine. I would put her blog Naked Capitalism in the top 5. In this interview with BNN she gives a very thorough set of answers to the questions raised. She has a very dim view of the potential for this to work. In the first place there is no agreement on what to do among those in government who are trying to put an offer together. The state AG's have to agree on what to ask for and the administration and congress are not in agreement either. The banks are lobbying hard against it as well.

The banks also have a conflict of interest. If they write down the first mortgage, they also have to write down the second mortgages which they have not written down to their market value. Investors, who own the securities that include these mortgages would like a settlement because the market value of their securities are down to 30% of face value. They would prefer write downs that would bring the value of the underlying security up to 50% of face value.

If a settlement can be reached the implementation will not be easy. The organizations that service the mortgages do not have expertise or the software needed to manage the modification process and that is not what they get paid to do. They get paid to collect the payments or to foreclose on mortgages. The modifications will also have to be substantial to stimulate the housing market because the total value of the gap between the market value of houses and the mortgage value is $480 billion.

Smith is not bullish on the housing market. New housing starts are on an annual rate of 479,000 and they need to be 1.2 million in order to provide for population increase and replacement of older houses. Some believe that the gap between new housing starts and what is needed is positive but Smith argues that there is an overhang of 6-8 million homes in inventory that need to be bled off before new construction can increase. There is little chance for the housing market to recover either as long we have 9% unemployment.