Marginal Utility

by Ken Houghton

The NYT continues the attempt to confusing "bubbles," subprime, and default:

EMC Mortgage Corp., specialist with a $78 billion portfolio of subprime loans -- for homeowners with weak credit -- this week launched a 50-person team it calls "the Mod Squad." Members will spend an unlimited time on the phone with troubled borrowers, sifting through their bills to compute a workable monthly payment. In an industry that often rewards workers for getting off the phone quickly, the team is preparing to speak to just three people a day.

"You can't just run this like a call center; it needs to be run like a counseling center," said John Vella, president and CEO of EMC. Right now, $2.14 billion in mortgages, 2.74 percent of EMC's portfolio, is in default, up from 1.93 percent a year ago.

So the issue is subprime loans?

Lenders have long modified loans for homeowners facing job loss, illness, divorce or a death in the family. But with many borrowers across the country struggling to keep up with mortgage payments, mortgage companies increasingly are prodding anyone who's having trouble making payments for any reason to give them a call. [emphasis mine]

Tell me another one.

Buried in the 9th and 10th graf:

Loose lending standards followed by lax modifications can merely delay a problem, [former Fannie Mae chief economist Thomas] Lawler said. He pointed to the raft of modifications done in the manufactured housing business in the mid 1990's, when easy credit led to a wave of defaults and reposessions.

"If people had known what the servicers were doing, red flags would have been raised; but by the time people knew what was going on, it was too late," he said.

So what is EMC going to do?

Vella said he hopes the Mod Squad will be able to modify up to 2,000 loans a month; six months ago EMC only modified about 400 loans a month.

EMC has hired an increasing number of contractors over the last three months to knock on the doors of shaky borrowers and drop off fliers asking the home owners to call the company. Last month, the contractors visited 3,000 properties.

The Mod Squad is planning a six-city tour; it hopes to attract struggling homeowners to information and counseling sessions with offers of $100 gift cards to Home Depot Inc. The number is (877) 362-6631.

But the interesting thing is where the "six-city tour" will be. From their press release:

The EMC Mod Squad will begin their six-city national road show in Dallas tentatively scheduled for May 4th and 5th, partnering with the local Consumer Credit Counseling Service. The team will also meet consumers in Atlanta, Chicago, Detroit, Minneapolis/St. Paul and Cleveland.

Only one of those cities (MSP) can—arguably—be claimed to have a "housing bubble." Take a look at the graphic from Jim Hamilton at Econbrowser.

I live in what might be called a "bubble" area (NJ). So do Brad DeLong (CA), Lance Mannion (NY State, though I would argue Lance's area isn't exactly bubblicious), and Susan Palwick (NV), to name three bloggers who deserve some traffic.

People in Ohio and Michigan (two of the three states with the highest foreclosure rates) don't know from bubbles, as save_the_rustbelt at AngryBear* reminds us. (ADDED: And even more specifically here, in the comment thread to that post)

As Hamilton notes, citing Felix Salmon:

[I]f anything the opposite appears to be the case: the states that are now experiencing the highest mortgage delinquency rates are the ones where the previous real estate appreciation had been the most modest.

which may mean the bubble has not yet popped.

Or maybe there are "ripple" effects when income inequality increases.**

More at a later date.

*now apparently a Group Blog

**The alternative, that there has been a noticeable recent increase in divorces and untimely deaths in the Bible Belt relative to the rest of the country, may be worth checking as a null hypothesis, but I doubt it's the way to bet.

Labels: Housing Bubble, Income Inequality, mortgage