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Dan Dorfman

Dan Dorfman

Posted: February 5, 2010 02:14 PM

Bank Heist: It's Mortgages, Not Money

What's Your Reaction:

Here's a tale of an unusual would-be "bank heist," one that doesn't require the use of any guns and is nothing like the kind that notorious bank robbers John Dillinger and Willie Sutton managed to pull off. This holdup, the brainchild of a brash hedge fund trader who used to receive seven-figure year-end bonuses, but who will soon be unemployed, is perfectly legal. So no need to call the cops.

In effect, our trader's heist centers on snaring a sharp reduction on one of his three mortgages. It would be equivalent to nearly a 50% discount and close to a $300,000 savings. Like Don Coyote, It seems like he's pursuing the impossible dream, but he thinks he's got a shot at pulling it off.

What's more, he's advocating that other homeowners in financial hot water also push for a discount from lenders on their mortgages. In particular, he's referring to the owners of the nation's roughly 45 million single-family homes.

Any success, of course, would mean homeowners could save themselves a healthy chunk of money, while at the same time creating more chaos at the banks.

Efforts to get loan modifications for troubled borrowers are hardly new--the Obama administration is also pushing hard on this score--but the trader's suggestion struck me as off the wall since banks would put themselves in a hole if they were to suddenly reduce principal all over the place.

They'll never do it, it's a futile effort and you must be Super Bowl partying too early, I told the trader.

He disagreed, reminding me of the proverb--nothing ventured, nothing gained. He noted that he was trying to get a big discount from the bank that holds the mortgage on a home he owns in Colorado. So far, he said, he has not gotten a no.

He further pointed out that with a growing number of people walking away from their homes and with mortgage delinquencies and foreclosures still climbing, the last thing banks want are more rotten loans on the books or to go into the real estate business. Whose to say, he asked, that banks, if they're pushed to the edge, won't be responsive to the idea of lowering principal?

Here's the background on his dilemma. In the early part of the 2000s, the trader, who spoke on the promise of anonymity and is crazy about skiing, bought a home in Colorado that ran him $2.1 million. He put down $350,000, and took out a 30-year fixed-rate mortgage for the remainder. He also has a vacation home in Hawaii that cost him $812,000.

In recent years, he ran into financial problems. In his personal account, the trader said, he lost a bundle (almost $2.3 million) during the market's wicked 2008 decline, and fear, he added, kept him from actively participating in the giant rebound that kicked off last March. To make matters worse, his firm is scaling back and he's one of the casualties

He's been delinquent on his last two payments on his Colorado home, which he put up sale about three months ago at $2 million. He's now asking $1,750,000, but so far his lower offer has only attracted two bids, both low-ball, one for $1.2 million and the other for $1.050,000. He rejected both.

He pitched his bank to lower the mortgage, which currently stands at about $1.5 million. After several days of haggling, the bank, he said, agreed to cut the principal to $1.2 million. The trader said no, insisting on a heftier reduction to $920,000. The bank said it would study the matter and get back to him.

The trader's idea of saving $280,000 sounds pretty good, but it seems like he's chasing a pipe dream. Why so? Because banks, according to all reports, show little interest in engaging in loan modifications, even from good borrowers. Further, despite legislative efforts to aid homeowners with troubled loans, the sad news is only very few are obtaining relief.

Last May, for example, the Senate rejected a measure supported by the President that would have permitted bankruptcy courts to lower the outstanding principal, as well as interest rates, on some home loans. That provided an insight into Wall Street's influence on government policy.

I bounced the trader's idea of a sizable home loan modification off a loan officer at Wachovia (now owned by Wells Fargo). He ridiculed it, saying it bordered on the absurd.

Why stop at housing loans, he asked? Why not ask banks to reduce auto loans and credit card loans, as well. "If you talk to a madman, you're apt to hear insane comments," he said. "Is that really helpful to your readers?"

Meanwhile, the big question: what next for housing? For some thoughts, I rang up Madeline Schnapp who has been right on the money in calling housing trends. Schnapp, the director of economics at TrimTabs Research, a West Coast liquidity tracker, is convinced the housing horror show is far from over. In support of this view, she cited the following:

--Mortgage delinquencies are now rising at the rate of 300,000 a month. The number of delinquencies, which stood at 6.2 million at the end of December, should rise, she figures, to 10-12 million by year-end.

--In December alone, 350,000 properties received some form of foreclosure and they continue at a brisk rate this year because of resets on option ARM mortgages and job losses. So far in early 2010, foreclosures are running at a rate of 75,000 to 80,000 monthly.

--Defaults on prime rate mortgages, as well as jumbo mortgages (generally around $470,000) are also on the rise because of high unemployment.

--About 25% of the nation's homes are under water (meaning the mortgages are greater than the worth of the house). On average, homeowners owe 25% to 40% more than the value of their house.

--Home prices, which peaked in early 2006 and are down about 30% since then, are likely to drop another 10% due to excess inventory and continued foreclosures.

The bottom line is obvious: A man's home is no longer his castle.

What do you think? E-mailme at Dandordan@aol.com.