Oh my. Friends, get ready to default on your mortgage…on purpose. The first chatter about the government sponsored loan modification initiative has surfaced from Paul Jackson at Housing Wire and what a disaster it is.
I have been telling you guys for months that a homeowner bailout is coming. But this is unlike anything I expected - it actually encourages mortgage holders of all paper grades to default. This is better than a Pay Option ARM because the monthly payments are zero! Why not default when you get to skip three years of mortgage payments and pay the government back five years from now at FED FUNDS RATE!
The New Bailout- NO MORE MORTGAGE PAYMENTS!
The plan is to FULLY SUBSIDIZE millions of borrower’s mortgage payments for three years. The program is predicated upon the housing market improving within the next 5-years. This is a really bad assumption to make but also could shed some light on the Fed’s inflation expectations. This plan may help borrowers de-leverage temporarily but will not help the broader housing market. It just kicks the default can down the road several years.
“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.”
This program does nothing about the leading cause of loan default across higher paper grades, which is negative equity. Those severely underwater borrowers that would chose to participate in something like this are the very ones that you want to foreclosure upon in order to clear the market in the first place. The primary reason one would enter a program like this is if you planned on walking anyway. After three years when their mortgage payments kick in again or five when the big balloon is due, do you really think the these underwater home owners will feel better about their situation or more passionate about saving the home in which they have lived for free for years knowing they are another $100k in debt? I think not.
The program will have the unintended consequences of encouraging Prime borrowers to default. What about the person with a lot of equity who can’t get a cash-out refinance due to lack of financing? Instead of selling at what he perceives to be a low, he can default and get a government loan. The plan will pay his mortgage payment, which he pockets at a rate of 1% or less for five years. This is the best cash-out refi plan I have ever seen. He can use the savings to buy a rental of second/vacation home. Or what about that family barely making their payment every month but who would have never defaulted. This gives them an easy way to ease the pain quickly by putting all of their payments on the back end like a Pay Option ARM.
However, when you think about it more closely it is ingenious. This could turn out to be the most direct, long-lasting stimulus plan ever concocted. When you give all those who are over-leveraged and are defaulting on their mortgage no monthly payment for three-years, what will they do with the money? Right - they will go spend every penny pumping the sectors of the economy that were so hot during the housing bubble years. They may also use some to pay down other debt, which of course helps the banks. The government is the strongest creditor out there so the banks are sure to get their payment every month. Hey, maybe the government can pay all three years up front so the banks can book it all at once and spike their earnings report.
The solons are banking on homeowners not saving a penny, which also means they will not be able to pay off the five-year balloon when it comes due. But that little issue is for a different group of regulators to figure out. The Fed’s know that the foreclosure crisis is so large and complicated that this hail-Mary pass may be the only possible ways to ’save’ consumers and revitalize the economy at the same time. Additionally, they are banking on massive inflation to carry home prices higher so in five years the borrowers can sell or refi making this all a gift. Now wouldn’t that be a perfect world!
One thing is for sure. This plan will not directly revitalize the housing market or ultimately save the home owner. This just keeps people spending and in more debt. When it comes to mortgage modifications and setting borrowers straight, unless a pre-emptive mortgage modification initiative involves the re-underwriting of all borrowers with ‘at-risk’ loan types and borrowers using strict full-doc guidelines with 28/36% debt to income ratios and market-rate 30-year fixed mortgages, it does not solve the problem. If you re-underwrite and reduce principal accordingly, the borrower is instantly de-leveraged. Please CLICK HERE for my recent mortgage modification post.
Housing-Boom was a Ponzi-Fraud
They won’t address the consumer de-leveraging the right way because it will be too costly. After being at IndyMac for months and seeing first hand that 90% of the loans are not as originally portrayed on the loan application, Sheila Bair understands that the only way out is a payment subsidization a plan.
They now realize that the entire housing ‘boom’ was artificial brought upon by exotic mortgage loan programs and leverage that were only available for a brief number of years and that will never exist again. Most of the loan programs contained fraud because the way that the programs were structured, they endorsed it.
Ultimate affordability through creative financing made it so everyone in the nation earned a minimum of $150k a year and housing prices reacted accordingly. Unsuspecting buyers who really earned $150k bought homes under fraudulent conditions and are now 50% underwater in their homes, paying the price. They will be asking for a bailout as well. However, they should get one.
Pre-emptive Mortgage Modifications & Wachovia
Many banks are all of a sudden coming out with pre-emptive loan modification plans. Wachovia was one of the first. But from early reports I am getting the program is failing miserably. Apparently Wachovia’s close ratio is less than 10%. This is because they did not estimate how many ‘liar loans’ were really out there or how far housing values have fallen.
Wachovia’s plan involves allotting a predetermined amount to each borrower they call a ’spend’. This is used to buy down the principal balance and/or interest rate to the level it takes for the borrower to qualify for another loan through FHA, Fannie or Freddie. The borrower then must sign a zero-interest silent second for the amount of the ’spend’ that has to be repaid in full in 30-years. However, only after one month into the program they are realizing that ‘nothing is at it seems’, which is what I have been telling you for a long time.
This is because so many loans were initially originated as limited doc (stated income/asset etc/liar loans) or using false paper work, borrowers just don’t qualify for new FHA, Fannie or Freddie loans with the amount of money allotted. Borrowers need much more help than they have provisioned. In the few circumstances in which the amount is enough, values are down too much for it to work. These will be continual problems when they try to fit a square borrower into a round hole. Click HERE for my Wachovia write-up. This is another reason why the ‘free mortgage payment bailout’ may be the only option.
All of this being said, after seeing what the government has in mind, I am convinced that the housing market collapse, price depreciation and foreclosure disaster will be with us for much longer than most think…at least five years!- Best Mr Mortgage
Feds May Be Considering Subsidy on Troubled Mortgages
By: Paul Jackson November 4, 2008
When it comes to the idea that Treasury’s TARP funds may be used to manage a bailout of troubled mortgages, all options are still on the table, and the only thing that most of us really know is that the plans under consideration have been stuck in the negotiating room for some time.
The Wall Street Journal suggested in coverage Monday that “disagreements over how to structure a federal foreclosure-prevention program are complicating and potentially delaying what is likely to be the Bush administration’s last attempt to forestall sliding home prices.”
One plan that may be garnering some consideration is the idea of a federal subsidy for troubled borrowers, perhaps tied to an effort to modify loans. A source near Democratic senator Robert Casey’s office in Pennsylvania forwarded us a copy of a memo on Sunday evening, said to have sparked some of the ongoing negotiations now taking place, although HousingWire could not obtain further details. The memo outlines a proposed bailout that would use three-year subsidies for some troubled borrowers.
The subsidy plan represents the thoughts of Assured Guaranty Ltd (AGO: 11.03 +5.15%) CEO and president Dominic Frederico, who had been asked by legislators to provide his thoughts a few weeks earlier. A spokesperson at Assured confirmed the authenticity of the memo on Monday evening, but stressed that Frederico’s input wasn’t the only advice sought by legislators looking for a solution to the nation’s foreclosure mess.
“We assume others were being asked for their input related to this issue,” said Ashweeta Durani, vice president for global communications at the firm. Frederico “was asked for his personal opinion [on] how the government might improve its response to the problems caused by high mortgage delinquencies,” she said.
Sen. Casey’s office had not yet commented on the memo officially when this story was published. The Pennsylvania Democrat sits on the Senate Banking Committee chaired by Christopher Dodd (D-CT).
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.”
Only one of many options
A few of HW’s sources on Capitol Hill suggested the general idea of a borrower subsidy is only part of what is now being discussed among Administration officials and legislators; key Democrats are said by our sources to be pushing hard for such a measure as a way to push bailout dollars directly to borrowers, after what they see as a handout to Wall Street firms needing capital.
The plan is also just one of the options being tossed around by legislators, we were told by a lobbyist on Capitol Hill with knowledge of ongoing negotiations. The newest idea now being considered is one that would see the role of the U.S. Department of Housing and Urban Development further expanded by relaxing criteria for FHA’s newly-minted Hope for Homeowners refinance program.
A report at American Banker on Monday evening suggested that officials are considering a new proposal to reduce the haircut needed to participate in the Hope for Homeowners program; investors must currently take a minimum 13 percent loss relative to current LTV to put a loan into the H4H program (actual losses are likely to be much greater, given the current LTV requirement). The report suggested regulators may move that loss level down to as low as 3 percent in order to encourage greater participation.
As HW reported last week, investors are so far reluctant to participate in the program, and many mid-tier lenders are finding themselves locked out of H4H altogether based on requirements from warehouse funding sources.
Write to Paul Jackson at paul.jackson@housingwire.com.
mrmortgage.ml-implode.com/2008/11/04/no-more-mortgage-payments-soon-get-ready-to-default/