03 Mar 09 Mortgage Loan Rescued
U.S. President Barack Obama’s $75 billion plan to help families avoid foreclosure should be bolder. While it is a meaningful rescue attempt that may help 9 million Americans, it could be doomed unless mortgage issuers have to write down principal to reflect current market values. The odious (to lenders) concept of a “mark-to-market” mortgage might be one way to put a floor on home-price declines. Why not give those in or facing foreclosure a haircut on principal? About 20 % would be fair, reflecting the national decrease in house prices.
And what about the diligent souls who have been paying their mortgage loans all along? Lower mortgage rates reflecting the Federal Reserve’s cost of funds — about 1 %, plus 2 %age points of profit for the lenders — would be beneficial. That may boost new-home sales, re-sales and refinance loans. A strong new mortgage law could limit writedowns before a foreclosure hits the overcrowded court system. To avoid abuse, mark-to-market would be used only as a last resort, after all other options are exhausted.
In its current form, though, the Obama mortgage bailout relies mostly on voluntary interest-rate modifications for relief through Fannie Mae and Freddie Mac, the government-seized mortgage companies. Designed to keep people in their homes, the plan calls for reducing mortgage interest rates so that monthly payments are eventually no more than 31% of household income.
Plan’s Shortfalls
If Congress sanctions mortgage write-downs or “cram-downs” in bankruptcy court — the essential next step in the bailout program that Obama supports — that will indirectly undermine home values. Each judge may be allowed to forgive as much principal as deemed appropriate. Even if a homeowner avoids bankruptcy and heads straight to foreclosure, a bank that repossesses the home can lose 40% or more in fees, commissions and discounting when the lender finally resells it. Marking down 20 % in principal would be a relative bargain.
How do we avoid the moral hazard of people spuriously filing for bankruptcy to dump their mortgages? An estimated 350,000 households might take this route, according to the Congressional Budget Office. That’s where a write-down cap would come in. Index it to local real-estate prices. When there’s a recession, you are more likely to get a break. If you have positive equity, it’s unlikely you will write it down.
Mandatory Counseling
Combine the write-down and bankruptcy provisions with mandatory counseling and screening. That might stem future defaults, which have been occurring in 57% of Fannie’s and Freddie’s loan modifications. Everyone has a stake in a sensible solution to the crisis. If your neighbor’s home goes into foreclosure, it will depress your property value and often lead to an increase in crime. The whirlpool of defaults also contributes to lower consumer spending, constricted bank lending and even lower home prices, which dipped almost 19% in December. Curiously, there was no mention in the White House’s plan of the many loan-easing techniques that Fannie and Freddie are already using. They include:
– Short sales: Also called “pre-foreclosure” sales, these transactions involve selling a house for less than its mortgaged value. The servicer and borrower then negotiate the payment on the difference between the net sales price and what’s due on the mortgage.
Ownership Handover
– Deeds in lieu of action: The borrower hands ownership over to the servicer to repay the debt and avoid foreclosure. This doesn’t work where there are second mortgages, though.
– Forbearance plans: Employing short-term cuts in monthly payments, the borrower promises to make his account current in the future. This is worthwhile in the case of job loss or illness.
– Charge-off in lieu of foreclosure: Instead of foreclosing and taking the property title, the servicer charges off the debt, which becomes a lien against your property? The balance due must be paid when the property is sold.
All these options are available even if your mortgage loan isn’t owned or insured by Fannie or Freddie. But you need to contact your mortgage-servicing company before missing payments. The Obama team also needs to address the question of how to prevent future defaults on “80-20” home loans or second mortgages, jumbo mortgage loans for more than $417,000 and specific remedies for the more than 2 million homeowners in foreclosure proceedings now.
Tags: home loans, jumbo mortgage loans, mortgage interest rates, second mortgages
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