Mortgage Mods-A New Plan And A Warning

Washington is awash in homeowner bailout plans and just about every politician and economist is lining up in favor of something. Here is the latest idea floating around and then a cautionary tale from history about the consequences.

First, the new plan that leaked out today has the government subsidizing homeowners’ mortgage payments. The plan is being advanced through Senator Robert Casey, a member of the Senate Banking Committee, and was prepared by Assured Guaranty Ltd. Assured just happens to be one of the larger mortgage insurance companies. Anyway here is the skinny as reported in Housing Wire:

“The proposal outlines the mechanics of a mortgage bailout that would cost
as much as $441 billion, relying primarily on a three-year borrower subsidy
that would be repaid in five years, with interest. “Upon receipt of a notice
of default on an owner-occupied primary residence, a homeowner could apply
to participate in a program under which the government would fully subsidize
three years’ mortgage payments in exchange for a note, to be paid in a lump
sum five years from receipt of the first payment subsidy, equal to the
payment subsidies plus interest accrued at the federal funds rate,” reads
the proposal, in part. “

“In five years’ time, participants would, in all likelihood, be able to
sell their homes or refinance their mortgages at amounts that would allow them
to repay the loan.”

Like me, you probably picked up immediately on the last sentenceof the quote. Clearly, the drafters of of the plan have an insight into the future of home prices since they seem confident that refinancing or sale will be available to the plan participants in five years. Is it just me that thinks they sound like mortgage brokers trying to sell an Option ARM to a first time homebuyer?

The warning about the consequences is found in another article from Housing Wire.
In it the author points out that during the Depression, numerous laws were enacted that forestalled foreclosures as well as began the process of limiting lenders rights to recover deficiencies. While the societal benefits of keeping people in their homes and on their farms was accomplished, the abrogation of legal rights that this result necessitated caused interest rates to soar. Lenders unsure of how to cope with a new
legal paradigm, effectively how to price the new risks, simply began charging excessive rates. Of course, all of the current proponents of mortgage modification are paying scant heed to the requirement that contracts will have to be eviscerated
in order to accomplish their goals. Investors are going to be bludgeoned into
accepting modifications which might be less favorable than foreclosing and selling the property would be. Does anyone think that the natural response to the
uncertainty this will cause will not be an increase in borrowing costs for new homebuyers?

I hope to have a longer post up about the loan modification issue by the end of
the weekend. For now let’s just say that this may be a road we could well rue ever
having ventured down.

Tom Lindmark

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