Stop foreclosures: Keep people in "their" homes … huh?


There seems to be momentum to “keep people in their homes” by modifying the bulk of the 4.6 million mortgages that are currently in foreclosure or payment delinquent for longer than 90 days.

There have already been some voluntary lender efforts to modify distressed mortgages by lowering interest rates or extending the term of the mortgages (say, from 30 to 40 years).  Generally, the programs hadn’t generated many modified loans … and for the loans that have been modified, about 40% become delinquent again within 6 months. (Note: I’ve seen ranges on this number from 35% to over 50%).

So, the Feds are pushing lenders to sweeten the mortgage modification packages.  Specifically, there’s talk of a broadscale government program that would pare mortgage interest rates to 4.5%.  And, there seems to be support for “cram downs” — having lenders reduce the principal loan balances to the current fair market value of the homes collateralizing the loans.  That is, if a defaulting loan is on a home that is “below water” — i.e. loan balance is greater than the home’s market value — the lender writes off the difference and issues a revised mortgage at the home’s market value.

These proposals strike me as both naive and very problematic.  Here’s another take on why these loan modification programs are generally bad ideas, and why cram downs, specifically, are a bad idea.

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Ken’s Take: Keep people in”their” homes … huh? 

The underlying premise of the proposed loan modifications —  “keep people in their homes” — is logically flawed

The overwhelming majority of foreclosures are investor-speculators and sub-primers — people with shaky credit ratings and undocumented incomes who put little or no money down when they “bought” their homes, who often made few if any mortgage payments — not even making a rounding error dent in their principal loan balances, and who have seen home prices slide in their neighborhood — putting their loan “under water”. 

Said differently, most of the mortgage delinquencies and foreclosures are on people who have no equity in the homes — they never did if they didn’t make a downpayment or a couple of years of mortgage payments and, in most cases, they have “negative equity” — since they owe more than the the homes are worth on the open market.

Bottom line: these folks are “occupants” not “owners” — unless they get credit for some sort of squatter’s rights.  There may be some legitimate reasons for enabling them to stay in the homes — but there’s no way that the homes are their homes.

In the next couple of posts, I’ll walk thru the economics: what crams downs aren’t even necessary, and the “free housing” moral hazard.  

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