More aid for distressed loans
I once owned a jazzy red convertible that was little and cute and every time I drove it I felt like I was riding along one of Monaco’s Corniches, the only problem was, it barely ran. The day the mechanic said “Get rid of it, you’re throwing good money after bad,” I knew my driving fantasy was over and my financial reality check was beginning; something the Federal government also needs to wake up to.
At the end of April, the Obama administration expanded the Making Home Affordable program, originally announced in February, by offering mortgage lenders incentives to lower borrowers’ bills on second mortgages. The principal of the original program was to slow down the rising rate of foreclosures by reworking the primary mortgage lowering homeowners’ monthly payments as well as giving lender incentives to participate.
However, one of the reasons the program isn’t working is because about half of all troubled mortgages have not only a primary mortgage on the property but also a secondary mortgage or home equity loan. If you recall, during the housing boom, lenders gave out second loans or "piggyback" loans based on the equity that had accrued on the property. These loans were promoted by the lenders and frequently given to individuals with poor credit scores and undocumented incomes.
The secondary loans have been an obstacle to homeowners who want to take advantage of the government’s program. Borrowers who are trying to get their primary mortgage modified at a lower monthly payment need the permission of the company holding the second mortgage, who have no motivation since there was no government incentive payments provided for second loan holders. Call me crazy, but you would think this flaw in the program would have been recognized back in February when the guidelines were being written and the funds were being allocated.
The expanded housing aid plan now is providing funds out of the $50 billion financial rescue money to encourage lenders holding second loans on properties to modify these loans at a lower interest rate. The plan is to give the mortgage companies $500 up front for each modified loan plus $250 per year for three years as long as the borrower doesn’t default. Similarly, borrowers would get up to $1,000 over five years applied to the principal balance of their primary mortgage and the government would pick up part of investors’ costs as well.
In addition, the expanding aid plan will also provide mortgage companies a $2,500 payment to entice them to participate in the Hope For Homeowners program that was launched last fall. The program has fallen flat since most banks did not want to absorb the losses that would have resulted. It was suppose to allow for 400,000 troubled homeowners to swap risky loans for traditional 30-year, fixed-rate mortgages with lower rates, however, only a handful of borrowers have been able to qualify.
Meanwhile, as previously reported, foreclosures are still increasing no matter how much money we throw at the problem. In spite of a lack of enthusiasm on the part of banks and borrowers, Treasury Secretary Timothy Geithner’s position is that the only way to stabilize the housing market is to keep people in their homes - a theory that thus far hasn’t worked.
It may be time for the Federal government to meet my mechanic, since their fantasy of saving homeowners from foreclosure is going the way of my red Fiat. Throwing good money after bad to uphold an unproven theory, sounds like, well, an unproven theory.