Hat tip to SM for sending this along, from the nytimes.com:
The Obama administration on Tuesday will launch its most ambitious effort at reducing mortgage balances for homeowners who owe more than their homes are worth.
Officials say between 500,000 and 1.5 million so-called underwater loans could be modified through the program, the first initiative to target homeowners who are current on their mortgage payments but are at risk of default because they have no equity in their homes. Some experts are warning, however, that the same knots that tied up prior initiatives could do so again.
Under the new “short refinance” program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration.
While the program puts taxpayers at risk—officials estimate one in five loans in the program could default—the government has set aside $14 billion previously earmarked for housing aid from the Troubled Asset Relief Program to cover losses.
The new program, which was announced in March, is starting as the housing market shows signs of renewed trouble and as the Obama administration’s signature Home Affordable Modification Program, or HAMP, falls short of its goals of helping three million homeowners. Half of the 1.3 million borrowers that enrolled in temporary loan modifications have fallen out of HAMP because they didn’t qualify. Only one-third has received permanent modifications.
The initiative also comes as mortgage rates fall to their lowest levels in more than 50 years. Average rates on 30-year fixed-rate loans dropped to 4.43% last week, down from 4.55% during the previous week, according to a survey published Wednesday by the Mortgage Bankers Association.
Analysts say that the program is most likely to succeed on loans that banks already own in their portfolios. It could also provide investors with a vehicle for getting rid of loans that have been modified and are current again. “It’s going to be a ‘take out’ for modified loans,” said Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York.
The program must resolve a stubborn problem that has hindered every other modification program: how to deal with second mortgages. The program says second liens must be reduced so that the total mortgage debt is less than 115% of the home’s current value. The government will make partial payments for banks to reduce those loans, but banks have been very reluctant to write down seconds that are current.
Investors that hold first mortgages are leery of writing down their loans without extinguishing the second because junior-liens are in a first-loss position. On a loan that has a second behind it and is heavily upside-down, “do I take the write-down and effectively pay off the second? I don’t think so. That second is worthless,” said Vincent Fiorillo, portfolio manager at Doubleline Capital, a Los Angeles-based fixed-income manager.
He said the program could work for loans without seconds, though he says it’s possible many borrowers will still have too much debt to qualify for an FHA-backed loan.
If they think $14B is all it would take to cover losses they’re smoking some seriously good weed.
p.s.: Besides, that TARP money is still taxpayer’s, too!
OT: Jim, did you get the pic I emailed you?
Sounds like another variant of principle reduction (of which I am not really a fan).
However, if we’re headed down this path anyway, the variant that I would prefer would be to put the home up for auction (possibly an actual trustee sale in states where that’s available). The twist would be that the note holder has to offer to refinance the current owners up to their outstanding loan balance. Essentially, the borrower is saying, “I want my principle reduced to one dollar more than whatever someone else is willing to pay for this house at auction”. If the borrower only wants the house up to a certain price, this is essentially a short refi. If the borrower doesn’t want the house at all, this is essentially a short sale / foreclosure. Also, if done as a foreclosure auction, any seconds are eliminated (or paid to release their liens).
The key here is that it’s not risk-free to the borrower (unless they’re waaaay underwater), and it gives someone else the opportunity to step in and say, “I want that house at that (principle-reduced) price. And if it had foreclosed, I would have had a shot to buy it!” Under this scenario, they could.
This is just a way to dump debt on the government instead of banks taking the loss.
Disgusting….
Soft drink aspirated out nose, just missing laptop on this one. Side aches from gales of laughter. . .
The Joker and his Goldman crew at it again… This sounds like something Tiny Turbo Tax Tim or Funny Yunny would come up with.
Hope & Change! Something-for-nothing USA.
Bwa Ha Ha Ha!
Do these programs encourage fence sitters to buy or remain on the fence? When will the government get out of the market’s way? They’re doing far too much to reduce inventory but not nearly enough to increase demand.
Mo’ money for the banks! Been raping us since 1913.
…mehh fix a few more if they’re lucky.
The rest are SOL.
…f’n joke…
ps…yes, that’s what this story has finally reduced me to. There is no end to the insantity and the ‘fox in sheeps clothing’ mentality of the government/banks.
Think my tank is empty…bunking with Shadash starting next week.
I’m with you and shadash, clearfund. The insanity never seems to end.
They’d better hurry. November is coming.
Maybe I am missing something, but isn’t the program described in this article pretty much the same thing as the “Hope for Homeowners” program that the Bush administration rolled out in 2008? By all accounts that program was a total failure in large part because lenders were not interested in it.
That program included a “dividend” equity share for the lender if the homeowner later sold the property for more than the short refi. I don’t see that aspect mentioned in the article.
Looks to me that this program may be nothing but reheated leftovers.
I’m so tired of this stuff. When are we going to have a return to free market principles?
What next? I hope that whoever is in charge of this program and the allocation of the 14 billion dollars has the common sense to make it a requirement of qualification that all form 4506’s that these borrowers signed with loan documents be verifed with the IRS. I would feel a lot better knowing my tax dollars were not going to a cheat. If they lied about their income to obtain the loan, send them a letter stating “You don’t qualify for the program and don’t let the door hit you in the ass on the way out if you decide to leave.” Common sense says you don’t play cards with people who cheat, so why should the government play with 14 billion in tax money at stake. Where and when in the next Tea Party? Someone book me a flight!
Dear Greenlander,
Please speak up, we can’t hear you over the sound of your heels clicking together:
http://www.youtube.com/watch?v=zJ6VT7ciR1o
Love,
The Free Market Flying Monkeys
This crap has finally made me numb.
Banks have been bailed out. People who bought homes they couldn’t afford were offered bailouts (that didn’t work). This is the first program that is geared to the borrowers that are current in their payments but are underwater due to drastic housing market declines.
I called my lien holder (ING Direct) yesterday, and asked about this program. I was told that “they do not participate in federal programs.” I figure that I’ll wait a few weeks and try them again. It makes you wonder what good this program is when it is voluntary on the part of the lien holder.
The banks sure were willing to participate in federal programs when it came to being bailed out. While ING is a Dutch company, they still took bailout money from the Dutch government. Where is the reciprocity for the tax payers that funded these bailouts?
I am disapointed already. How is this program expected to work when a bank like U.S. Bank simpy says “sorry not participating”. Plus, even if they did, it hurts credit scores which makese no sense when to participate you must have a certain credit score and must never have defaulted. Therefore, it is targeting responsible home owners who clearly wouldnt want their credit score to plummet.