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May 20, 2008

Whatever happened to the governor's subprime agreement?

It looks like more mixed results for Gov. Arnold Schwarzenegger's Nov. 20, 2007
agreement with subprime lenders to work out deals with struggling borrowers.
You may remember it. The governor's agreement was designed to avert a foreclosure disaster that would wreck the state's economy.

The state Department of Corporations, which monitors the agreement, has released
results of its first-quarter survey of 10 subprime lenders who service California loans.

I've had some time now to look this over with a calculator. Here are are some initial numbers that lenders are reporting to the state for the first quarter (Jan., Feb. and March):

Closed workouts: 60,508
Foreclosures: 56,478

Types of deals offered struggling borrowers:

Loan modifications: 24,039
Temporary relief from payments: 11,583
Loans paid off: 10,831
Accounts paid current: 8,404
Short sales: 3,655
Deed in lieu of foreclosure: 212

How most of the 24,039 loan modifications break down:

Reduce interest rate below initial/start rate: 10,499
Freeze interest rate at start rate for five years or more: 3,894
Freeze interest rate at initial/start rate for less than five years: 964
Extend loan for longer period: 724
Reduce principal balance: 559
Reduce interest rate below reset rate, but above start rate: 165
Other: 6,964 (I don't know yet what other means exactly)

It sounds like a lot of workouts, and is certainly better than nothing. But it's still unclear how much of a difference the governor's agreement is really making.

Partly, that's because conditions have changed in the loan world since he struck the agreement in November. The original idea was to do blanket rate freezes to free up time for lenders to deal with more difficult cases. But interest rates have fallen and so rate resets have apparently prodded fewer subprime borrowers toward foreclosure than feared.

Yet at the same time it seems more borrowers are just giving up and walking away and more borrowers can't make their payments no matter what kind of a deal a lender gives them. So bottom line, lenders are back to time-consuming one-on-one workouts, which is frustrating a lot of non-profit loan counselors who can't seem to get their clients help in time for them to save their houses.

DOC Commissioner Preston DuFauchard in this memo
seems to be saying that results are mixed because of all these factors and that it's having limited impact.

In fact, his exact words in the memo are these:
"Despite a coordinated effort by state agencies and cooperation with local jurisdictions and the non-profit sector, the magnitude of the housing downturn is such that even these efforts will have limited impact in dealing with the mortgage crisis."

Schwarzenegger made a very big deal about this when he announced it, and a lot of tongues wagged around the capital that it was all for show. That was six and a half months ago.

All these lenders are reporting to the state what they're doing to honor his agreement with them. But there were still more foreclosures than ever the first quarter of 2008 - which seems more like the definitive statistic.

We're expecting to be able to talk with the commissioner tomorrow about this. But at first glance it seems somewhat like our first
story on this back in March. The statistics are complicated, things are playing out in unexpected ways in the economy and it's still kind of hard to nail down the impact.

Image courtesy of National Governor's Association