Foreclosure Discussion, Delayed
Feb 11th, 2009 | By Rob | Category: housing
Loyal readers may have noticed that I haven’t yet done my review of government and lender mortgage modification programs. It’s not that I haven’t been thinking of issues related to foreclosures. It’s simply that I’ve been too busy to sit down and put the work into the post that the topic deserves. I hope to remedy that soon.
In the meantime, President Barack Obama and Treasury Secretary Tim Geithner have been busy leaking details of their new foreclosure mitigation program. Although it was expected to be announced as part of the financial stability plan, Geithner postponed announcement of the foreclosure proposal for a few weeks, saying only that the Obama plan would spend at least $50 billion to fight foreclosure issues.
President Obama said in a recent speech that the legislation would facilitate loan modification by making it easier for loan servicers to modify mortgages packaged and sold to investors. In case you haven’t heard, mortgage companies packaged groups of loans together after they made the loans and sold the income from them to investors. The loan servicing company then collects the payments from the homeowners and splits the proceeds from the group of loans among the investors. The terms of the securitization of the loans require the consent of all or most of the investors to modify a mortgage in the group. Currently, loan servicing companies can’t modify some home loans because they cannot get the agreement of all of the investors. It has been a major impediment to voluntary loan modification.
The Obama foreclosure plan is also expected to provide monetary incentives to the loan holder to modify mortgages. Currently, investors modify homeowner mortgages on a voluntary basis out of self-interest. They would rather have the homeowner paying their mortgage than undergo the expense of foreclosure, maintaining the house while they own it, and selling the property. By providing a cash incentive for mortgage modification, it could prod reluctant creditors watching their assets decline in value to get off their sofa and encourage loan modification.
I also would expect that the foreclosure assistance program will include a cramdown provision for bankruptcy judges. President Obama has been pushing to allow bankruptcy judges to modify the first mortgage of a homeowner in bankruptcy for some time. It is hoped that the threat of loan modification by a bankruptcy judge will put an added incentive on mortgage investors and loan servicers to voluntarily modify home loans instead of pursuing foreclosure. For homeowners to take advantage of this provision, they will have to contact their mortgage loan holder at least 10 days before filing for bankruptcy proceedings.
The foreclosure proposal is also rumored to create national standards for modification of mortgages held by the government through Fannie Mae and Freddie Mac. Newspaper reports expect that these loan modification standards will be based on the FDIC plan implemented at IndyMAC Bank to modify mortgages.
One potential downside for homeowners to mortgage modification is that President Obama has talked about requiring homeowners to give up some of the equity in their home when housing values recover. This is a bit of a reversal from other proposals I have heard suggested, which promoted decreasing the principal balance to give owners more equity and an incentive to keep paying their mortgage. On one hand, this new provision would help to solve the moral hazard issue by increasing the cost of mortgage modification to healthy borrowers. On the other hand, the impact on your credit score / credit report of falling behind on your mortgage may already be enough to prevent homeowners from purposefully not paying their mortgage. And for owners already owing much more on their mortgage balance than the value of their property, I think it will be difficult to find a fair reduction in their equity.
I didn’t watch the congressional testimony of the bank executives today, but I have read two statements from it of relevance to foreclosures. First, two bank executives agreed to stop foreclosures until the announcement of the Obama foreclosure plan. Second, 50 percent of homeowners who lose their homes do not contact Citigroup at any point during the foreclosure process. In other words, 50 percent of homeowners put their head in the sand and never try to contact their lender to save their home.
I’m a bit disappointed by both numbers. Hopefully, after the nation debates President Obama’s foreclosure mitigation program, more homeowners having trouble paying their loan will contact their lender or a foreclosure specialist to save their home. Hopefully the banks will also come to realize that the American public was there to add capital to the banks when they were in trouble. It’s only fair that the banks help out the American public when they are going through tough times, and that they need to do more than lend to credit worthy borrowers.
Just as an update, the announcement of the foreclosure mitigation plan is currently scheduled for Wednesday, February 18, 2009.