Politicians talk a lot about plans to modify mortgages so fewer people default, but these plans depend on so much paperwork, that few people are having success with them.

The Obama administration came up with a $75 billion program to help homeowners adjust down their mortgages so they can stay in their homes, but few people have been able to take advantage.

It's simply too much work. Volunteers and interns working to assist people say it is a helpless task.

The New York Times reports:

Under the plan, the government offers mortgage companies $1,000 for each loan they agree to modify, then another $1,000 a year for up to three years.

Hanging in the balance is more than the fate of individual homeowners. The administration portrays its mortgage program as a crucial piece of its broader effort to restore vigor to the economy. If the effort fails, foreclosures will continue to surge and home prices will probably keep falling, sowing fresh losses in the financial system and threatening to crimp credit anew for businesses and households.

Yet in the four months since the Treasury Department announced the program, millions of new homeowners have slipped into delinquency and foreclosure. For now, progress is constrained by the limited capacities of mortgage servicing companies, said Michael S. Barr, the assistant Treasury secretary for financial institutions. He offered the first signs of the administration’s impatience with the institutions that control home loans.

“They need to do a much better job on the basic management and operational side of their firms,” Mr. Barr said. “What we’ve been pushing the servicers to do is improve their infrastructure to make sure their call centers are doing a better job. The level of training is not there yet.”

The administration still does not know how many mortgages have been modified under the program. In a recent interview, Mr. Barr estimated the number at “over 50,000,” explaining that precise figures must wait for a soon-to-be-completed tracking system.

Few lenders offered this option until recently.

They're waiting on the government to issue appropriate underwriting guidelines.

Reverse mortgages can't buy co-ops in New York, which is slowing the introduction of this financing to this populous state.

The New York Times reports:

Reverse mortgages, which are offered through the home equity conversion mortgage (HECM) program run by the Federal Housing Administration, an arm of HUD, had previously been available only for refinance transactions. In order to qualify, borrowers must be 62 or older.

Bronwyn Belling, who recently retired as the national program coordinator of the AARP’s reverse mortgage education project, said the recent guideline changes would help borrowers improve their living circumstances without forcing them to relinquish all their savings for a new home. She noted, though, that the loans can be complicated.

Here’s how a typical transaction might work: Let’s say a 75-year-old woman lives in a home valued at $700,000, with an outstanding mortgage of about $100,000. She sells the home for $700,000 and finds another — closer to the grandchildren, with no staircases and minimal upkeep — for $625,000.

Instead of securing a traditional “forward mortgage” for the new property, she could obtain a reverse mortgage.

Two banks are planning to return to the jumbo mortgage market.

This market has been dead since 2007 due to a high rate of defaults.

Maybe happy days are here again?

Bloomberg reports: JPMorgan Chase and Citigroup are expanding their “jumbo” mortgage businesses used to buy the most expensive homes, helping revive a market that shriveled amid a three-year jump in homeowner defaults. JPMorgan resumed buying new jumbo loans made by other lenders this month, after halting purchases in March, a spokesman said. Citigroup is again offering the loans through independent mortgage brokers, a spokesman said. The two New York-based banks are signaling new interest in a market hobbled since 2007, when record-breaking defaults on home loans caused investors to flee securities backed by mortgages.

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Bear Stearns and Lehman Brothers had huge investments in securities backed by home mortgages, a market with rising defaults and collapsing home values.

Unlike banks, which loans out money it gets from depositors, Wall Street security firms such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns, depended on borrowing in the unsecured commercial paper market. In other words, they were always 24 hours from a liquidity crisis.

On March 6, 2008, Tim Geithner, the ninth president of the Federal Reserve Bank of New York, gave a speech outlining the reasons for the credit crisis — the extension of large amounts of credit to those less than worthy, a historic boom in real estate prices that made credit risk easier — in theory — to hedge.

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Economist Thomas Sowell appeared on Dennis Prager's radio show May 27:

Tom: If the results weren't so serious, all this would make a great Gilbert & Sullivan musical, with all the mutually contradictory statements by the politicians…

Dennis: The president said the other day that we don't have any money.

Tom: What that means is that they are going to have to print some…and that means inflation.

The deficit run up by this administration will exceed the deficits run up by all other administrations.

Dennis: I don't know what it would take to awaken the American people.

Tom: I have a terrible feeling that it will take an American city in radioactive ruins to wake up some of them.

Dennis: Was the housing boom artificial?

Tom: Yes, in two senses. It started off as a great political crusade for affordable housing. Now, most of the housing across most of the United States was more affordable than it had been ten years earlier or twenty years earlier, but in some particular places, particularly coastal California, the housing was so expensive that people were paying half their family income just to put a roof over their heads. But the politicians tried to turn this into a national problem so that they could have a federal program. So they started leaning on banks to start making loans to people they wouldn't make loans to otherwise and who couldn't meet the standards, and similar pressure was put on Fannie Mae and Freddie Mac, who were assigned quotas of how many mortgages they bought had to be for low and moderate income people…

The net result was that they lent money to people whose likelihood of repaying them was low, but the banks didn't care, because once the banks made the mortgage, they sold the mortgage to Fannie Mae, for example. Then it became Fannie Mae's problem, which meant it became the taxpayer's problem.

Fannie Mae issues their own securities. As they take on more and more risky mortgages, their own securities in a free market would decline in value because people would be afraid to buy them. But as everyone knew the government would be willing to step in to keep Fannie Mae afloat, they bought Fannie Mae securities because even if the securities were worthless, the government would come in and make up for it.

Dennis: Where did the issue of Wall Street's incredible inventiveness in packaging these lousy loans and leveraging themselves at 30-1, what part did that play?

Tom: That made matters worse. Since the mortgages they were packaging together were new, they were not only more risky, but no one knew how risky they were. They relied on the credit-rating agencies like Moody and Standard & Poors to give these things a rating, but Moody's and Standard & Poors had very little data over the years on these particular kind of mortgages. They had data going back a century on conventional 30-year fixed mortgages. So therefore their ratings were reliable. But as someone who once worked for Moodys said, it was like using a century's worth of statistics on weather in Anartica to predict the weather in Hawaii.

Dennis: I've been told by economists that Canadian banks are doing just fine because they could never get into the debt that American banks can get into.

Tom: Canadian regulators are not pushing banks to lend to people who can't repay the loans.

I hold government 90% responsible for housing crisis. People blame greed in Wall Street. You can't make money making loans to people who can't pay you back.

The rating agencies didn't really have competition to keep them straight. The government designated which rating agencies would be recognized for the purpose of government transactions with government entities.

The Democrats took the lead but George W. Bush pushed the idea of low downpayment mortgage loans by the Federal Housing Administration. The last time I checked, the Federal Housing Administration is still making loans with less than 4% down. That's just another accident waiting to happen.

Dennis: Why was it particularly severe in California?

Tom: It's more than zoning, it is a whole panoply of restrictions, more than environmental restrictions, we're talking open space laws, historic preservation, farmland preservation. You name it. If it will stop building, it's flourishing in coastal California. It's amazing that people don't understand that if you take half the land in a county off the market and forbid anybody to build anything on it, then the price of the other half of the land is going to shoot off the roof.

Prior to these restrictions, which came in prior to the 1970s, California housing prices were the same as housing prices everywhere else. It is only since then that housing prices in California have skyrocketed so that they are three times what they are elsewhere.

Barney Frank's storyline now is that it was all due to inadequate amounts of regulation, which was due to the Republicans.

When the boom was booming, Barney Frank took credit for pushing for looser lending practices. In one place, he said, I want to roll the dice a little more.

When you roll the dice and it comes up snake eyes, suddenly he didn't want any responsibility for it.

Dennis: What about all these tranches and these derivatives?

Tom: Those things facilitated third-parties financing the mortgages… But the crucial problem, without which there wouldn't be a problem, was that the monthly mortgage payments from millions of people stopped coming in. And when that happened, it didn't matter which types of sophisticated financial securities you had on Wall Street, if the money is not coming in…

Dennis: European banks did their version of this with Eastern European economies. We had a worldwide banking crisis.

Is there any solution?

Tom: I would like to see a constitutional amendment forbidding the federal government from having any effect on the housing market.

Fannie Mae and Freddie Mac serve no purpose that a private mortgage buyer can't do, except that politicians can get Fannie Mae and Freddie Mac to do things that a regular business won't do, things that are helpful to a politician's constituents and therefore to politicians.

Caller: How much would you attribute this crisis to amoral capitalists?

Tom: Zero because greed is always there. It's there in good times and bad times. You can't attribute the bad times to greed. People don't satisfy their greed by lending to people who can't pay them back, which is what government pushed for, lending to people who don't meet the standards.

Caller: The symptom is foreclosures but the disease is defaults. By the government treating the symptom of foreclosure they are making the disease of defaults worse. In California, when you let someone stay in their home with a loan modification or reduce their principal balance, why would their neighbor keep making their mortgage payments?

Tom: He's absolutely right. The laws of Canada do not allow you to default and walk away. In Canada, they can go after your other assets.

The government is buying bad mortgages. The FBI are cracking down on fraudulent mortgage operations. Stricter standards are in place. Help is available. Mortgage rates are low. There's a flood of refinance applications and Bank of America recently announced plans to hire 6,000 to help process refinance applications.

From the Washington Times:

Yet, the government is cleaning up the mortgage mess by purchasing bad mortgages. This, coupled with stricter underwriting guidelines, should create a demand for mortgage investments, which would keep rates down.

This is quite a conundrum. Mortgage rates, which have spiked slightly as of this writing, remain at levels not seen in perhaps 50 years. There is no guarantee that rates will remain this low for another two years. I tend to be more optimistic about interest rates, but no one can predict with reasonable certainty that rates will remain this low for long.

If you plan on being in the property for several more years, I would recommend that you get started on a refinance application.

It is a lot of hassle to refinance these days. You need to provide a lot more documentation than previously. Lenders are much more skeptical and reluctant to lend money to anyone with a less than stellar financial position.

The Barack Obama administration has announced a plan to help people who are underwater with their mortgage.

Here's some advice:

Are you planning to do a cash-out refinancing to pay off the home equity line, consolidate mortgage payments and lock in a low fixed rate? If so, a front-end ratio that prevents you from qualifying for a refinance will stymie such plans.

If you're trying to minimize total interest expense, you may be better off staying in your current loans. The risk to that approach is that interest rates could increase when the home equity loan comes due and it's time to refinance.

The good news is that several factors are working in your favor. The home is worth more than the outstanding mortgage balances, you won't need to pay private mortgage insurance if you do refinance, you're current on both loans, and you've got good credit. You just don't have the income levels to qualify to refinance.

If you're not having a problem making your current mortgage payments, you should consider standing pat. You have a 30-year, fixed-rate mortgage that is only about 0.5 percent higher than the current Bankrate national average for that type of loan. If you can use the mortgage interest deduction on your taxes, the differential on an after-tax basis is even less.

The great refinance boom of 2009 may be over.

Apps are down 8%. Rates are edging lower.

Reuters says:

U.S. mortgage application demand slid to the lowest level since mid-March, driven by a drop in requests to refinance loans even as borrowing costs dipped toward record lows last week, the Mortgage Bankers Association said on Wednesday.

Applications for loans to buy homes rose marginally in the week ended May 8, holding slightly elevated levels in the midst of the keenly watched spring selling season.

U.S. housing continues to stumble in its deepest slump since the Great Depression.

But near record-low mortgage rates and a 30 percent price drop by some measures from the 2006 peak are luring buyers — mostly those who benefit from a first-time buyer federal tax credit and those secure in their jobs.

DESPITE THIS SLUMP IN REFINANCING, BANKS ARE HIRING STAFF.

Why?

Because they are so far behind in processing refinance applications this year.

Up to 80% of new mortgages are refinances.

Refinancing is taking longer these days because lenders require more documentation. They got burned by going skimpy on docs over the past decade.

The Financial Times says:

The rush of US homeowners to refinance mortgages at lower rates is creating a boom in the home lending business, prompting banks to hire thousands of new employees and put them to work on extra shifts to process mountains of paperwork.

"Many of them work all day, go home and have dinner with their families, then go back to the office and put in a few more hours, because there's work to be done," said Greg Gwizdz, national sales manager of the Wells Fargo home mortgage unit.

Lenders could originate up to $2,780bn of new mortgages this year, the Mortgage Bankers Association says.

I was a lousy math student. I got a D in Algebra in high school as a freshman. I got Ds in my junior year in Geometry. I repeated it as a senior and got a C.

I got to community college. I took Beginning Algebra. I got a C. I took Intermediate Algebra and got a C. I took Trigonometry and got an A. I took Calculus and got a B.

My grades improved when I started rising at 4 am to study my maths.

I majored in Economics at UCLA.

Derivatives are a prime function of Calculus. You can only do derivatives if you know Calculus.

Was our recession caused by lack of financial regulation? Perhaps. Financial instruments developed way beyond government's ability to regulate them.

The New York Times says:

This will be the Obama administration's first attempt to regulate the finance industry.

Derivatives have been widely called a cause of the credit crisis.

For decades, derivatives have been barely regulated.

The federal government wants the permission of Congress to regulate various esoteric financial instruments such as including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

Now swaps and other derivatives traded must be backed by capital reserves, just as banks put aside capital to back up loans.

What effect will this have on the finance market? Borrowing money will become more expensive. Derivative trading will become more public.

The amount of derivatives a company can sell will be limited.

Democrats seem happy with these new regulations.

Both sides of the political aisle accept that more regulation is inevitable.

The administration is seeking the repeal of major portions of the Commodity Futures Modernization Act, a law adopted in December 2000 that made sure that derivative instruments would remain largely unregulated.

The law came about after heavy lobbying from Wall Street and the financial industry, and was pushed hard by Democrats and Republicans alike. It was endorsed at the time by the Treasury secretary, Lawrence H. Summers, who is now President Obama’s top economic adviser.

At the time, the derivatives market was relatively small. But it soon exploded, and the face value of all derivatives contracts across the world — a measure that counts the value of a derivative’s underlying assets — outstanding at the end of last year totaled more than $680 trillion, according to the Bank for International Settlements in Switzerland. The market for credit-default swaps — a form of insurance that protects debtholders against default — stood around $38 trillion, according to the international swaps group. That represents the total amount of insurance that has been written on various kinds of debt, but the amount that would have to be paid out if the debt went into default is considerably less.

As the credit crisis has unfolded, trading in credit-default swaps has cooled, market participants said. The collapse of A.I.G. took a huge player out of the market and banks, hobbled by losses, have curbed their activities in the market. Still, derivatives trading desks have been profit centers at major banks recently.