New Orleans When it comes to the gnarling problem of loan modifications and saving the citizen wealth that homeowners have built in their property, the record in the Great Recession has been terrible. There are no sure signs that it is going to get better under the new announcements of an enhanced $50 billion dollar announced by the Federal Government and the bulletins by Bank of America and Citi, two of the largest government stake banks, that stepped up first in the orchestrated roll-out of the new program. The biggest problem is that there are too many, “ifs,” “ands,” and “buts” for me to believe that this new initiative, even though going in the right direction, is going to be able to get to sufficient scale to provide real relief for the 7 million behind on their payments or the 11 million additionally who are now “underwater” owing more than the house is worth.
The money and the intentions are good, but there these are still programs propped up by incentives and persuasion rather than real agreements. All of the announcements are couched in the uncertainty of seeing how each mortgage servicer might respond and how securitization pools might react. If the last couple of years are any guide, this is a group of cats that doesn’t want to be herded. I’m not sure what they are waiting for, which is part of my argument that the real problem may be the unwillingness to see the value written down on the balance sheets.
The other problem in my mind is still one of basic understanding of the crisis. There are too many of these “new” plan features that are written from a perspective that we’re still dealing with the “deserving poor” or people simply caught out in the middle of the street when the light changed. These are all people who will have to crawl through the eye of needle to get to this new policy heaven. This is a program written by bankers at the Treasury Department, I would bet, talking to other bankers at their cuff-linked meetings, and not anyone dealing seriously with the homeowners or the community impact of there being no real solution.
As a quick look, here are some of the requirements:
You are actually receiving unemployment benefits. If you have been unemployed too long or were self-employed or in circumstances where you have been blocked for benefits or have exhausted them – tough luck.
The mortgage bite has to be over 31% of your combined family income and that’s just the mortgage with no allowance for taxes or insurance payments.
The loan servicer is required to offer you reduced payments of between 3 and 6 months, but the amount of the reduction is just added to the back end of the loan (so there’s no writedown still for the mortgage holder or pool).
If you hope to get a writedown on the mortgage to get rightsized and out from the deep water, then the 31% applies as well as the fact that you have to owe 115% of the value of your first mortgage still. If you have some equity, none of this is for you. If you can’t understand why you are dying to make the note against a recover in 20 or 30 years, then none of this will change the incentives for you to walk away. If there is principal forgiveness, it will come in dabs every year for 3 years predicated on your ability to be right on time with those 36 payments.
Oh, and they are careful to state that the banks may not be willing to participate in this which is why the two big government banks had to step in front of the bullet before the guns were blazing. And, there’s no guarantee that your credit won’t be ruined if you are lucky enough to participate in these programs. Other observers were speculating that the writedowns might only be 10%, which is hardly worth the climb.
A quick read makes it seem that it is still easier for the rich man to get to heaven through the eye of that needle that for a working family to hold on to their homes in the Great Recession.
Good luck with this! Let us all know when it gets serious.