Thursday, October 2

Restoring confidence

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.


Anonymous said...

This last part seems particularly important, as a large number of even the cautious homeowners/buyers will be facing resets in the next couple of years (me included).

Seraphine said...

ouch. any way you frame it, this is a disaster, especially for taxpayers and people who work and who otherwise serve as the middle class in america.
you go along, save, work hard to attain the american dream and ka-poop, taxpayers end up paying for somebody else's mistakes.
ka-poop. here comes rationed healthcare.
ka-poop. there goes whatever little social security we were promised.
ka-poop. there goes thousands of jobs and businesses.
ka-poop. there goes pension and profit-sharing plans.
ka-poop, ka-poop, ka-poop.

Seraphine said...

but lindsay, how can we bite the bullet that bleeds us?

Cart said...

Restoring confidence? I wonder how you really do that with so many competing claims over so many competing issues.
The mortgage crisis is just part of a much bigger credit crisis, and already morphing into the impending corporate credit crisis.
Corporate execs are hammering for and sort of welfare which might mitigate their errors, or preferably pull profit out of the mess.
The market idiocy ignores everyone and everything. ‘Like a cat on a hot tin roof’ it skitters and jumps mindlessly, stirring up the wider community in its wake.
On it goes without real, collective thought and planning; just more of the same greedy or frantic reaction. Commentators , on the one hand rail against attempts to protect the consumer as ‘corporate welfare; then turn and demand assistance for troubled corporations.
The only way to restore confidence is to start imposing some logical thought processes on the problems. Though I note some academic economists are in personal turmoil because outcomes have proved their favourite theories wrong. So I’m not sure where the appropriate leadership could come from.

susan said...

$700 billion in no way covers the trillions of actual debt on the books world wide. They'll be back for more but what they've taken already is non-existent in the currency as it stands. What's needed is a sensible and realistic growth program but without serious oversight I don't see that happening.

Seraphine said...

dear china.
now that you have most of the money in the world, can we have another little loan until we get our paychecks next week?
oops, sorry, we meant *IF* we still have a paycheck next week.
europe and america

lindsaylobe said...

Hi Kvatch - Welcome - I trust you do get a better deal with your reset in a few years !

Sera Cart & Susan - I have included another posting with a few more thoughts which attempts to answer your questions and possibly others.

Best wishes