Fannie and Freddie Expand the Hope Program
Under their government conservatorship, Fannie Mae and Freddie Mac, the largest US mortgage-finance companies, will adopt new programs to reduce foreclosures and speed the process of modifying loans. Unfortunately, their plans will only help those most likely of losing their homes, leaving the average middle-class family struggling to maintain.
The target of this program is borrowers who are at least 90 days delinquent with high loan to income ratios (or just about anyone that has purchased a home in the last five years). Neel Kashkari, the Treasury’s interim assistant secretary, said, “with such broad adoption, this new protocol will be a standard for the industry to quickly move homeowners into long- term sustainable mortgages.” Unfortunately, what it seems to be missing is any sort of long-term vision, because as it stands right now this program is only applicable in households that are at least three payments behind. For everyone else… there is no hope.
Tonight there was talk that nearly 5 million people will go through foreclosure in the next three years – this program as it stands today is designed with the hope of helping 500,000 of them. Not an inconsequential amount, but certainly not an answer to the problem. Certainly not an answer to years and years of financial turmoil as lendors are forced to wonder – who is next to default? When will the other shoe drop?
The other issue to consider is that someone, somewhere, owns a mortgage backed security that is given some semblance of value based on the amount of the loan, the interest payable, and the number of years remaining. The minute that these loans are adjusted the owner of these securities suddenly loses value. Either in their return or, in some cases, in the original principal of their loan value. In some of these instruments, that’s an acceptable risk, but it’s unreasonable to assume that everyone that has a loan out today is really distressed, defrauded, or unable to pay, which means that some well-meaning investors will pay a price that is neither fair nor equitable.
Human nature being what it is – programs like this will certain invite a certain amount of fraud from people that can meet their payments but don’t feel as though they should have to when so many others are being helped out of their difficult loans. These people may decide to fall behind to get their cut of the bailout, unleashing a chain reaction that drives default rates even higher. Before you know it there will be internet shucksters offering classes and one-stop shops for how to get your mortgage modified under the new program.
Either way this is like trying to hand off a cactus to a three year old. In the best of all cases something will happen and home values will stop declining. This will benefit the homeowners and the securities holders, while opening opportunities for banks to begin lending, moving the country back to a more level ground. In some scenarios, these modifications could even be good for the securities holders, because they end up maintaining their principal and simply stretching out the time before they see their return.
At the end of the day, nobody knows with any certainty how this is going to play out. The market has shown that it will decide the consequences of poor decisions, but only hindsight will prove 20/20 and I believe that it’s going to be years before we can even begin to see clearly what has happened today let alone be able to forecast anything other than a bumpy road leading into the future.
Ranter
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