The Homa Files

Excerpted from WSJ: “Rescue Includes Steps to Help Borrowers Keep Homes”, Sept. 29, 2008

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Ken’s POV: Just imagine a non-citizen investor (e.g. a “flipper”) who lied on his mortgage application, didn’t put any money down  and hasn’t made any monthly payments.  He’ll get his mortgage adjusted.  You won’t

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The bailout package includes more aggressive steps to help troubled borrowers keep their homes by requiring the government to do more to reduce loan balances and interest rates.

The bill calls on the government, as the owner of mortgages, mortgage-backed securities and other assets backed by real estate, “to implement a plan that seeks to maximize assistance to homeowners and use its authority to encourage the servicers of underlying mortgages, and considering net present value to the taxpayer, to take advantage of…available programs to minimize foreclosures.”

Such measures could reduce monthly loan payments for homeowners and, in theory, increase the likelihood that borrowers keep up mortgage payments. It could also slow down the growing number of foreclosures.

The modifications are designed so that the payments on a borrower’s mortgage don’t exceed 38% of gross income.

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Although the latest plan may evoke anger among taxpayers who pay their mortgages on time, economists say helping those in trouble could benefit all taxpayers by blunting the impact of the financial crisis on the housing market and local communities.

Getting borrowers back on track could help reduce the cost of the bailout to taxpayers. In recent years, troubled loan portfolios have yielded about 32% of book value, compared with more than 87% for loans in which the borrower is current.

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There are more questions than answers about how effective the government’s program will be. If the government buys entire loans.

Another crucial unanswered question is how many borrowers will be helped by stepped-up loan-modification efforts. “There’s a great deal of skepticism about the ability of modifications to improve the performance of loans.”

Deutsche Bank recently looked at subprime loans packaged into securities, most of which were modified in 2008. It found that roughly 35% of the loans were at least 60 days past due roughly six months after the modification.

“Investors think these loans will all redefault in a year or a couple of years and the losses will be higher.” Historically, modifications haven’t done that well.

One fear is that if mortgage companies or the government, is too liberal in offering help, more borrowers who might otherwise stay current on their loans will fall behind to get a better deal. “What we don’t want to do is undertake some kind of program that changes the behavior of those many, many people who undertake extraordinary effort to pay their mortgage and make sure they can stay in their home.”

As many as 40% of homeowners, or about 20 million households, will owe more than their home is worth by the time the housing market stabilizes.

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Full article:
http://online.wsj.com/article/SB122265697254684627.html?mod=article-outset-box

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This entry was posted on September 29, 2008 at 7:12 am and is filed under Government & Politics, Mortgage Crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.