Market Mover: FHA to Buy Up to $300Bln 'At Risk' Borrowers?
A: Big talkings going on from House Services Committee Chairman Barney Frank! Lets get to the rumor that is rallying the street but wait for an official announcement to discuss what any announced plan means. Clearly, the federal government believes they MUST do something aggressive.
According to CQ Politics:
House Financial Services Chairman Barney Frank , D-Mass., on Thursday proposed the federal government step up efforts to help struggling homeowner.Barney Frank & SBC Chairman Christoper Dodd, who say we are in a recession, are targeting PREVENTION OF FORECLOSURES as the next federal measure to stabilize the domino effect of the falling housing market. Lets wait for an official announcement before jumping to any conclusions, but clearly the markets are reacting to this rumor.
According to a broad outline released Thursday, the program would allow the Federal Housing Administration to provide up to $300 billion in new loan guarantees for “at risk” borrowers.
But lenders would have to make substantial write-downs of a loan’s principal amount — to no more than a home’s current market price — before the FHA would back the loan. And the new loan would be made on terms that a borrower could repay.
In exchange for taking a “haircut” on the loans, the existing holder of a mortgage would have “no further credit exposure to the borrower,” Frank’s summary said. The refinanced loans, with FHA insurance, would be easier to sell on the secondary market.
“This could potentially refinance between one and two million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market,” according to a summary of a discussion draft.
More Sources:
Rep. Frank Offers New Foreclosure-Help Proposal (Marketwatch.com)
Dodd, Frank Unveil Foreclosure Prevention Legislation (Bloomberg)
Posted by Charleston real estate blog
Thu Mar 13th, 2008 04:14 PM
Noah, I don't want to jump to conclusions but ... what about the 48 million mortgage holders who are paying their mortgage monthly. As long as the government is printing money like a drunken sailor (with certainly no offense to any sailor, drunken or not), why doesn't the government just pay off everyone's mortgage and call it a day.
Posted by Noah
Thu Mar 13th, 2008 04:34 PM
there are a lot of people that do not want this kind of govt plan! Then again, there are a lot that do.
you know my feelings on too much gov't intervention and socialism. i believe in market forces, but we do need help so Im not sure where i stand yet on this until i read actual legislation. i worry too much help will occur.
Posted by Beth
Thu Mar 13th, 2008 05:41 PM
Two thoughts:
(1) It sounds like the closest thing to a total 'bailout' while having the lenders pick up the tab. And the lenders would consider this if it's a better alternative to having lousy assets on their balance sheets. ugh.
(2) Who would qualify as "at risk"? Here's a way to prevent forclosures: have homeowners pay according to their signed contract - it's called a MORTGAGE. And if you don't pay you can't get another one. It's called RESPONSIBILITY.
So if the mutual fund I bought as part of my IRA went down in value, will the SEC bail me out so I can afford to retire?
Posted by Charleston real estate blog
Thu Mar 13th, 2008 05:57 PM
Noah, I'm not diminishing the scale of the problem, however to have the taxpayers bail out Wall Street, the big banks and the "troubled borrowers" who supposedly didn't know what they were signing is certainly a bad precedent.
Could I get my tech stock losses reimbursed by the government. After all, I got caught up in the euphoria and didn't know what I was doing :)
But take a look at diminishing value of the dollar. The printing press has run out of ink. And I fear that a great deal of the promised help is election related posturing.
I read you with respect and learn a great deal from your writing. Thanks, Howard
Posted by Nick
Thu Mar 13th, 2008 05:59 PM
I think I agree with you on this one. The interventions in the market that caused the real estate bubble will definitely not solve the problems this time. If anything, we'll end up with more malinvestment and another bubble.
Of course, Charleston real estate blog might be predicting the future. If the dollar keeps losing value and more of it is printed out of thin air, inflation may help some homeowners pay off increasingly worthless mortgages. Banks don't make much when they take in 6% interest and the dollar is losing 12% of its value in the past year.
Posted by Noah
Thu Mar 13th, 2008 06:38 PM
"So if the mutual fund I bought as part of my IRA went down in value, will the SEC bail me out so I can afford to retire?"
exactly!
Posted by Barack
Fri Mar 14th, 2008 07:16 AM
I can certainly see why people here do not want to make any efforts to keep people in their homes.
It would certainly be a better course drive them into bankruptcy and foreclosue, destroy consumer confidence, tank the economy further, and lead us into the Second Great Depression...!
Let's hear it for Adam Smith and Ann Rand!
The Frank plan would cost $200 billion dollars. We need to preserve that money for Iraq and a possible needed war with Iran. Let's not waste it on these near'de well homeowners!
Posted by Brenda
Fri Mar 14th, 2008 11:49 AM
No, it seems we may need it to keep the banks afloat. What will we have to keep them afloat later, when the reprecussions of allowing (one might say encouraging) the American consumer to overspend his/herself to death are fully felt?
And, it's been this rabid hatred of anything resembling regulation and oversight that allowed this to occur in the first place. I'm no economist, but four years ago I looked around and said to myself, these numbers just don't add up. There was nowhere near the additional wealth needed to justify the increased expenditures in this economy. I didn't learn until two years later that the banks had taken it upon themselves to allow people with little to nothing down to acquire mortgages at over three times their income. Logistical problem solved.
The Bear in Bear, Sterns certainly seems apt.
Posted by Beth
Fri Mar 14th, 2008 11:58 AM
Sarcasm aside, this really isn't a "bailout" - it actually sounds like a decent plan that won't cost taxpayers as much as people think but makes Congress look as if they're doing something:
(a) It's an extension of an existing FHA program for those who qualify (and many homeowners would have qualified anyway before they got into this mess, they just didn't know about it)
(b) The loan guarantee is contingent on the lender's writing down the principal, avoiding any contractual issues with MBS investors, thus ensuring a level of confidence among investors in the secondary market
(c) the homeowner will have to repay the loan.
The only questions I have:
(1) How do you define "at risk" borrowers?
(2) How will these borrowers become aware of the program?
(3) How will this program be administered? in other words, coordinating among the borrower, the lender, FHA so that the new guaranteed loan will qualify?
The answers to these questions will determine the full impact. My guess is that only a select few homeowners will benefit.
Oh, and all of those folks already in forclosure? Sorry, you're outta luck
Posted by Doug Quance
Fri Mar 14th, 2008 12:25 PM
The lenders holding second mortgages, of course, will get killed - as they should. They hold the higher risk notes at higher interest rates... and when the first mortgage holder forecloses - the second lien holder is out of luck.
So with this proposal, the first lien holder can write off any losses down to the current market level - then shift the burden of risk from their shareholders to the taxpayer via FHA mortgage insurance.
Interesting.
Definitely a good deal if you're a shareholder in an entity holding first mortgages.
Not so good if you're a taxpayer. What else is new?
Of course, the second lien holder will have to agree to this - which I predict will NOT happen... as evidenced by the difficulty in short sales involving second lien holders. LOL
Posted by mike
Fri Mar 14th, 2008 01:32 PM
Doug - technically, the second mortgage holder, in order to have any control, has to pay off the first mortgage before they get paid. That means that if they foreclose, they would need to pay the first mortgage holder in full, or they can't take control - the first mortgage-holder takes control.
In the situation where you have 85% first mortgage and 10% second mortgage (95% leverage), the foreclosured property would need to have an expected value of more than 85%, or the second mortgage holder would have an expected loss greater than their initial note in order to take the property. At this point, it seems, that most second mortgage holders would be better off writing off the note in a foreclosure situation where the first mortgage goes so far up the debt stack, and just let the first mortgage get what they can.
So, technically, if the second mortgage would receive zero principal from a short sale, and the only other solution is a foreclosure, the really decision goes to the first mortgage holder, if not immediately, then ultimately, unless the second mortgage holder likes losing more money than just their principal.