How Forgiveness Fits in Housing-Fix Toolkit

The Wall Street Journal, 7/30/2012

“Already, Fannie and Freddie have relaxed refinancing rules so that anyone with a loan backed by the firms can refinance, no matter how underwater, as long as they are current on payments. Accelerating amortization provides less of a break than principal reduction, but it nevertheless returns the borrower to terra firma much sooner.”

COMMENT: Borrowers who are current are not asking for forgiveness. They and their lender have underwater loans and merely want to drop their interest rate. If the loans were not underwater, they could easily do this. If the lender drops the rate, the borrower can more easily make the payments—improving the security for the lender. With a lower monthly payment, the borrower has more money to spend—helping the economy. Fannie and Freddie have the policy right. Now the implementation. Merely send a letter to every borrower, “Your interest rate was 6%. It is now 3%. Your new monthly payment is ____.”

More from the article--
“Columbia University economists Glenn Hubbard, Christopher Mayer, James Witkin and mortgage-bond veteran Alan Boyce spelled out in a paper how this might work. A homeowner who owes 117% of his home's value and who took out a 30-year loan with a 6.7% rate five years ago could refinance now into a 15-year loan with a 3.1% rate. That would increase the monthly payment by just $24. But it would leave the borrower with positive equity in less than three years, assuming home prices stay flat; within five years, the homeowner would have 17% equity. Doing nothing, the borrower would be underwater for more than seven years.”

COMMENT: If the term  were 20 years or 25 years instead of 15 years, the borrower would have a lower monthly payment, helping the borrower, the lender, and the economy. If the borrower has been mature enough to make payments on a bad deal since 2008, then the borrower is mature enough to select the term. Just do it. All the other borrowers whose loans are not under water have been able to do it.

Counties taking refinancing into their own hands

 

BY NICK TIMIRAOS

A bond-investor group is suggesting rules that would make it difficult for banks to provide the lowest-cost mortgages to homeowners in cities that plan to use eminent domain to modify mortgages.

In a draft of the rules circulating among members, the Securities Industry and Financial Markets Association has proposed preventing home loans in those communities from being bundled into the most commonly used—and cheapest—pools of mortgage-backed securities.

This year, California's San Bernardino County and two of its largest cities, Ontario and Fontana, created an entity charged with restructuring mortgages for certain borrowers who owe more than their homes are worth. ...

Banks' Skittishness Limits Impact of Low Mortgage Rates

83% of U.S. banks are much less or somewhat less likely now than in 2006 to provide mortgages to households with relatively low (620) credit scores and a 10% downpayment, according to the Wall Street Journal. Thus, despite the Fed's efforts to stimulate the economy by easing credit, "Monetary policy is having no effect on the vast majority of people," the newspaper quotes Fed researcher Paul Willen as saying.

Source: Fed Wrestles with How Best to Bridge U.S. Credit Divide

Obama Plan

The headline says, "Obama plan to lower home mortgage payments, but how much?"

"Obama's argument is that as more families refinance at a low interest rate, incidences of default and foreclosure will diminish, helping to stabilize home values and restore consumer confidence. The families who benefit will also get extra cash in their pockets each month, which they can use to buy other things in the economy or to pay down debt.”

Of course there are too many conditions:

"Participants must live in the home and be current on the mortgage. Availability would be more limited if a loan is deeply underwater (loan more than 140 percent of home value) or if borrower is unemployed."

Just tell Fannie and Freddie to do it. Refinance all borrowers who are current. Forget the appraisal. They have been the major roadblocks to refinance. They know who is current. Just press a button on their computer, send those borrowers a letter, "Your payment is now lowered to _____. "

This could be one small step for mankind. But the conditions will make it a very small step.

Invasion of the House Snatchers

"Invasion of the House Snatchers" is the latest in Rolling Stone

http://www.rollingstone.com/politics/news/17390/232611

Here are two quotes, "the borrower-lender relationship can only go one of two ways: full payment or total war." And "Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them.... Bank of America...is required by law to buy back every faulty loan."

Drop the rates, fewer foreclosures. Better for the bank. Better for the borrower.

True interest rates and default rates

From Minyanville:

"Default rates estimate the probability of getting your money back; interest rates how much you get paid for taking that risk. Banks and dealers made gobs of loans valuing them way too high because they under-estimated default rates and over-estimated the interest rates they'd receive (the bank gave full value to the paper assuming the borrower would successfully be able to pay higher rates when the lower teaser rate converted to a higher fixed rate).

"So all this paper was carried on the books at a high price: The banks showed profits by marking up the value of the paper.

"That brings us to our paradox. Now we know that those variables were fallacious: higher default rates and lower interest rate assumptions are forcing those banks to write-down the value of those loans. … If banks assume higher interest rates so they get more cash over the life of the loan, they must then assume higher default rates for those go up when interest rates, the cost of a loan, goes up."

http://www.minyanville.com/businessmarkets/articles/todd-harrison-midterm-elections-quantitative-easing/11/2/2010/id/30895

And, if interest rates on a given loan goes down, the default rate goes down. The rate which the bank makes, net of defaults, improves. Just lower the mortgage rate on exisiting loans!

Appraisals prevent refinance

1. Think about it. You are an appraiser. All the appraisals you did for the last 3 years are "wrong." And every media outlet claims you made a mistake by "over-valuing" houses. They question your integrity. What do you do today to compensate? .... Undervalue. So current owners can not refinance their own home and get a lower interest rate. Does this mean appraisers are now operating with more integrity now than in the past? Or less?

2. It gets worse. One method of appraising is "Capitalizing" the expected cash return. This is not normally applied to houses, since houses don't have an "income stream." (Or do they? Isn't a mortgage payment a negative income stream?) The "cap rate" is normally related to the interest rate on a loan. The appraisal process incorporates sophisticated arguments, but basically just divides the income stream by the "cap rate." Apply that approach to the 7%, 30 year, $100,000 house loan. The monthly payment is $661.44. Cap that at 7% and the "value" is $113,000. ($100k/7% x 12).
Now cap it at the current mortgage rate of 4.5% and the "value" is $175,000. The lower the interest rate, the higher the value of the home.

Of course it makes intuitive sense. The lower the monthly payment, the more likely the borrower can make the payment, the more secure the loan. Lower the interest rates!

3. "The real estate market depends on such homeowners being able to sell and move up; without them the trade-up market can't grow." -LA Times. What if these underwater borrowers lived on Cove Street and just got the lower rate but did not lower their monthly payment? Assume they are currently 75% underwater. With their current 7% interest rate, they would take over 14 years to reduce the principle to 75% of their original balance. After 14 years, their home is now worth the amount of the mortgage. After 14 years, they can trade up.
However, if rates were dropped to 4.5% and they kept making the old monthly payment, it would take less than half that time. And, if houses stop depreciating, (which they will if rates are dropped), and modestly appreciated (which they will if rates are dropped), then that 6 years compresses to less than 5. They can trade up in less than half the time. Drop the interest rates!