The $US300 billion government sponsored program has just kicked off in the USA; swapping current housing loans for more affordable ones.
Lenders have an option to take a loss on the initial loan and accept a new insured loan as effective payment in full for previous indebtedness.
E.g 1. Authorizes FHA to insure up to $300 billion of fixed 30 year refinanced loans up to a max of 90% of current assessed value for those borrowers in arrears from October 1 up to September 2011.
2. Existing mortgage holders take the proceeds of the insured loan in payment in full of all pre-existing indebtedness.
This 3 year legislated program seeks to assist 400,000 households who have negative equity; whose indebtedness exceeds house valuation.
It makes sense but is it too little too late?
This fiasco has created a different structure. In the past the traditional lender and householder would have worked together to avoid foreclosure to renegotiate a compromise or accommodating reset.
But the bundled mortgages transferring ownership to unrelated parties left loan servicing arrangements with trustee companies. So far these service providers appear to be lagging in their efforts and in the early days adopted the role as disinterested reactive foreclosure processors.
Here are some extracts from the State Foreclosure Prevention Working Group (a group of state attorneys general and state banking regulators working to prevent home foreclosures) recent 3rd report in relation to this aspect.
“Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer, a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases.”
“While some progress has been made in preventing foreclosures, the empirical evidence is profoundly disappointing.”
“Servicers appear to have reached the ‘low-hanging fruit’ of subprime loans facing interest rate resets, while not developing effective approaches to address the bulk of subprime loans which are in default before interest rate resets,” the report said.
“Based on the rising number of delinquent prime loans and projected numbers of payment option ARM loans facing reset over the next two years, we fear that continued reactive approaches will lead to another wave of unnecessary and preventable foreclosures.”
Are they now preventable?
The Securities of parcels of some of those bundled mortgages are being sold for as little as 5 to 25 cents in the dollar. It’s a lot cheaper to offer another loan at an affordable rate to the householder currently in arrears and write off the current indebtedness and illusionary higher future interest rates. You also avoid the subsequent costs of foreclosure and dislocation.
Apart from that a proactive approach is essential to help contain its consequences and engender confidence. Bite the bullet and employ more people to get a better handle on it!
I think the government owned Freddie and Fanny also need to reduce interest rates on mortgages (very small reductions have already happened) to stimulate demand which will also help get a hold on the plummeting house prices.