Thursday, November 13, 2008

Foreclosure Prevention Plans

We have been waiting for weeks to hear the new plan for preventing foreclosures, and we get this?

If you don't have a plan that is actually going to help, do us a favor and don't bother with a news conference. Among it's many problems...

1. Only applies to Fannie and Freddie loans. (Doesn't apply to most subprime loans.)
2. You have to be 3 months behind to qualify. (Great incentive to default.)
3. No principal reduction, and the payment is set to a % of your income. (Doesn't change your upside down mortgage status, thereby not eliminating the root cause of long-term default.)

A real loan modification program is very important for the Valley.

The Frank-Dodd FHA refinancing bill passed this summer isn't getting much business since it started October 1. This is the one that would put people in a new fixed rate FHA loan at 90% of homes value if the lender agreed to accept 85% of the home's current appraised value to pay off the original mortgage. It's funny to think this was criticized as an overly generous taxpayer bailout this summer. Things have certainly changed. Why would anyone be interested in this program now, when the bailout plans are getting more generous by the day. I still think this original plan had the basics right, and would prefer to see it modified to be more attractive to borrowers and lenders - inevitably increasing the risk of loss for taxpayers.

Rather than refinance the loan at 85-90% of current home value as in the original plan, why not set the refinance loan at 95-100% of current home value. Rather than have future appreciation shared with the government (if house is sold at a profit in the future), have this future appreciation shared with the lender who wrote down the principal. Of course, the borrowers would still need the income to qualify for their new fixed mortgage and it would only be available to owner occupants.

This greatly increases the incentives for lenders to participate. It is a better deal for most homeowners than mailing the lender their keys. For any loan modification program, dealing with the securitization of mortgages (multiple owners) and 2nd mortgages continues to be one of the toughest issues.

See these links for better explanations of shared appreciation mortgages (SAM)
Brookings Institution and see Rescuing Main Street in this essay

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