Comments on: “Bailing Out” Homeowners Through Mortgage Restructuring

By: James Kwak

James Kwak — Fri, 07 Nov 2008 11:48:50 +0000

No plan has been finalized, so no one knows. Probably there will be some kind of income-based threshold. For example, at IndyMac they are restructuring loans so your mortgage is no more than 38% of your income. In that case, if 38% of your income can support a mortgage that your lender finds acceptable (is worth more than foreclosing), then you may get a modification. However, your lender may prefer foreclosure to a mortgage based on 38% of your income.

By: fou saeteurn

fou saeteurn — Fri, 07 Nov 2008 08:06:45 +0000

I need the government bail out program to help me to lower my payments. I can’t get the loan, because my house no,Equity on it.
So do i have any hope of that and when is the bail out program is ready?

By: fou saeteurn

fou saeteurn — Sat, 01 Nov 2008 23:27:45 +0000

I think the bail out program ,they should help the home
owners who are in behind payments and lower the payments for those who has high payments no,Equity on the house.

By: James Kwak

James Kwak — Mon, 27 Oct 2008 03:26:56 +0000

Robert: My impression that not many loans have been modified is from the news, which is not always a great source. So I looked for a good source. Calculated Risk is a very good source for housing-related information, and I found this post: http://calculatedrisk.blogspot.com/2008/09/loan-modifications-anecdotes-and-data.html. Basically the post says it’s hard to find good data to know the answer to your question.

By: James Kwak

James Kwak — Mon, 27 Oct 2008 03:10:22 +0000

Thanks for the link. The Northern New Jersey example shows that lenders are willing to part with their distressed mortgages at a discount, and at least sometimes a deal can be worked out that is helps the homeowner as well. (They do end up foreclosing, sometimes.) However, it isn’t happening at scale. Biltmore (the hedge fund in that article) is mainly buying whole mortgages from small regional banks. Buying securitized mortgages is much trickier for legal reasons, and cutting that knot may require government intervention.

By: DaveinHackensack

DaveinHackensack — Sat, 25 Oct 2008 03:28:57 +0000

"So why isn’t this happening?" It is happening, to some extent. Here are examples of entrepreneurs in Northern NJ and Southern California buying distressed mortgages and modifying them. Instead of buying opaque securities derived from mortgages, the Treasury Department could use a couple hundred billion dollars of the $450 billion it has left in its rescue fund to buy distressed mortgages themselves, at significant discounts, and then modify the terms. If Treasury offered to buy first mortgages for 50% of the current appraised value of the property, or 50% of the face value of the mortgage, whichever was lower, it might set a floor under the value of mortgages, and, presumably, under the the complex securities derived from them. It could also reduce foreclosures, help stabilize home prices, and free up capital for new mortgage loans.

By: Franz

Franz — Fri, 24 Oct 2008 19:35:08 +0000

The price was originated determined by the buyer’s cash flow according to the interest rate it was locked. So a fair split in damage can be determined by the difference in PV of the house based on the 30 years fixed mortgage and previous mortgage rate. Government can subside the fixed rate to reduce the damage (buying down the points). If the subsidy exceed a limit, then it make sense to foreclose.

By: Chris Cook

Chris Cook — Fri, 24 Oct 2008 18:01:14 +0000

There is no deficit-based solution that works IMHO.

We should instead rethink Equity through a new approach to REIT’s within a partnership framework.

Step One: Transfer the freeholds of distressed housing into the hands of a Custodian – eg State Street, Northern Trust.

Step Two: agree reasonable and affordable rentals, and then link these rentals to an agreed measure of inflation or to a %age of market rental levels (same thing).

Step Three: divide the pool of rentals into proportional Units or “nth’s”.

Step Four: sell the Units to risk averse investors, particularly those interested in ethical or Islamically sound investment (this model is entirely consistent with Islamic investment as it should be, rather than the current Islamic veneer on an UnIslamic reality…).

Anything the Occupier pays more than his rental automatically acquires Units at the market price, until eventually he has enough Units to be in economic terms at least the “owner”.

For investors there is a reasonable (2 or 3%?) index-linked income. In risk terms, there is a virtuous circle: because the rental is affordable, it is more certain that it will be paid, and hence a lower rate is justified…

In summary, the solution to the crisis is a “Debt/Equity swap” on a massive scale.

But not Equity as we know it, Jim…..

By: Real Time Economics : Secondary Sources: Bailing Out Homeowners, Keynes

Real Time Economics : Secondary Sources: Bailing Out Homeowners, Keynes — Fri, 24 Oct 2008 15:17:32 +0000

[...] Bailing Out Homeowners: On Baseline Scenario blog, James Kwak says indignation at the idea of “bailout out” homeowners through mortgage restructuring is misplaced. “Let�s take a simple example. Henry the Homebuyer buys a house for $200,000. He puts down $20,000 and borrows $180,000 from Lisa the Lender. The interest rate resets one year later and now Henry can no longer afford the monthly payments; at the current interest rate he can only cover a $150,000 mortgage. Unfortunately, the house has lost 30% of its value and is now worth only $140,000. Assume Henry wants to stay in the house. At this point, Henry has zero equity. Lisa has a mortgage asset with a face value of $180,000 but that is really only worth about $100,000. Her only recourse is to foreclose, in which case she will gross $140,000, but after all the fees she will probably net something like $100,000. So what should they do? They should renegotiate the mortgage on some terms that Henry can afford and that are worth more than $100,000 to Lisa. This isn�t a bailout; this is good business. And, frankly, apart from Henry and Lisa, it�s none of anyone else�s business.” Meanwhile, John Berry of Bloomberg says foreclosures are helping the housing market. “This is a harsh process. Home values are down. Families have been displaced and neighborhoods disrupted. Vacant houses have fallen into disrepair. On the other hand, the excesses of the bubble years are being absorbed. Could this be accomplished with less pain and loss? Could the housing market in Prince William and Riverside counties — and San Diego and Las Vegas and Phoenix and Miami and Tampa, Florida — be stabilized in some other way? I think the answer is no. Lenders are modifying some mortgages to prevent defaults and keep loans on their books. But because each mortgage-and-borrower pairing is different, there’s no one-size-fits-all solution.” [...]

By: Robert VanDerVelde

Robert VanDerVelde — Fri, 24 Oct 2008 14:33:37 +0000

With FHA-backed mortgages, how much of the loss taken by the lender is repaid by FHA, and at what point in the process? Does the lender have to foreclose and sell the property; if so, this would be a huge incentive to NOT renegotiate.

My question: you say “given how few mortgages have been modified…”, but what are the stats? How many troubled mortgages have been renegotiated, and have the reworked mortgages been successful (in other words, not simply delaying an inevitable foreclosure).