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Will the Government Help Pay-Off YOUR Mortgage?


We reported (see below) on a Reuters article saying there was a rumor spreading from 'Washington to Wall Street' that the government was considering major cramdowns on the mortgages of 'underwater' homeowners.

The World Street Journal reports that the rumor is just that - a rumor.

Obama administration officials knocked down rumors on Thursday about any plan for new programs–dubbed an “August Surprise” –to streamline refinancing or cut mortgage balances for homeowners in a bid to stimulate the economy without asking Congress for money ahead of the midterm elections.

Speculation has intensified over the past week as some economists have proposed that the government put cash in more Americans’ pockets by making it easier to refinance. A news report on Thursday suggested that such stimulus might also include a plan to lower mortgage balances for some homeowners.

These reports have worried mortgage investors, sending prices down. But elements of the so-called surprise programs already exist in far more modest forms and there are no plans expand them, administration officials said. The Obama administration said in March that it would create a pair of programs later this year that would allow mortgage servicers and investors to voluntarily reduce loans balances.

One of those programs—which hasn’t been finalized yet but will be soon—will allow mortgage investors to refinance current homeowners who are underwater, or owe more than their homes are worth, into loans backed by the Federal Housing Administration if investors are willing to take a haircut. (*see FHA Short Refinance Option below)

And it already has had for more than one year a separate program that allows some homeowners to refinance underwater loans. That initiative—called Home Affordable Refinance Program, or HARP—has fallen short of its initial goals.

Calculated Risk on the key points from the *FHA Short Refinance Option:

In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain 'underwater' non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth - or 'underwater' - because their local markets saw large declines in home values.
...
Today, FHA published a mortgagee letter to provide guidance to lenders on how to implement this new enhancement. Participation in FHA's refinance program is voluntary and requires the consent of all lien holders. To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner's primary residence. And the borrower's existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower's combined loan-to-value ratio to no greater than 115%.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

And, CR had strong commentary on those, like us, that reported the original rumor:

Note: this has nothing to do with that nonsense rumor yesterday about a government principal reduction program. This was previously announced in March.

Ouch! We’re just reporting what we hear (and we did stress that it was a rumor).

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Oringinal Post

There is some interesting talk about how far the administration is willing to go to bring back the housing market. The original stimulus package included the purchasing of mortgage-backed-securities (to lower interest rates), home buyer tax credits (to spur demand) and a comprehensive foreclosure prevention program (to help keep families in their homes). Though these programs initially stopped the freefall in prices, it seems their impact is already waning.

Interest rates are still at historic lows but demand contracted as soon as the tax credit expired. The administration has helped over 300,000 families avoid foreclosure but that number is less than 10% of the families in jeopardy. The ‘shadow inventory’ of distressed properties is beginning to be introduced to the market. It seems the market might be headed for another dip down in prices.

What comes next? It seems the administration is headed toward a very dramatic conclusion: if we don’t lower the principle on people’s mortgages, the market will continue to falter. Let’s look at this issue:

The Challenge

As prices continue to fall, more and more families are falling into negative equity (where their mortgage is greater than the value of the house). There were 14 million people with negative equity at the beginning of 2010. Deutsche Bank just projected that number could jump to over 20 million by 2012.

The reason this is troubling is that when people fall into negative equity the chances of them not paying their mortgage increases dramatically. Housing Wire quotes the Deutsche report:

"Many existing academic studies model homeowners' default decision based on the theoretical hypothesis that a borrower would exercise a default when it is in-the-money, i.e., when the borrower's house has negative equity. Therefore, a homeowner with negative equity would default even though they can still afford to make their mortgage payments.”

If the people in negative equity started to ‘walk away’ in large numbers, the housing market might collapse.

The Talk

As reported by Calculated Risk, the Federal Reserve Bank of Cleveland provides new research that supports residential mortgage cram downs:

"[One proposal is] to revise Chapter 13 of the bankruptcy code to allow judges to modify mortgages on primary residences. The type of loan modification under consideration is known as a loan cramdown or loan stripdown because the judge would reduce the balance of the secured claim to the current market value of the house, turning the remaining balance of the mortgage into an unsecured claim (which would receive the same proportionate payout as other unsecured debts included in the bankruptcy petition)."

The Fed is actually saying that forgiving mortgage debt in certain situations makes sense. The theory is, if we forgive debt, we would avoid a negative equity situation.

The Rumor (remember, we said RUMOR)

Reuters, in a blog post yesterday, said:

"Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth … The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie."

Wow! It will be interesting to see if the administration actually pays-off some of the balance of people’s mortgages. We’ll keep you abreast of all developments.

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5 Responses to “Will the Government Help Pay-Off YOUR Mortgage?”

  1. Caroie Sanek August 6, 2010 at 9:12 am # Reply

    I reposted this on my blog page, I reposted it to two FB accounts, I got a little political and told people there is no more important time in our lives to have the CHANGE we were promised happen than now. Thanks as always for this amazing blog – yesterday I cut back on all that filters into my FB – you all made the cut. Anyone coming to FAR in Orlando this year?

  2. Phil Munroe August 6, 2010 at 11:06 am # Reply

    I agree completely Caroie, the time is now. November is right around the corner, get educated and lets make the change that is needed. It is nice to hear that the government is looking at helping out more homeowners, I just hope that you don’t have to be distressed to be helped out. Those of us that have seen DRAMATIC pay-cuts and still manage to keep our mortgages current should be able to see some relief as well. Great blog Steve, keep it up!!!!!!!!!!!!

  3. James Barath in Northwest Indiana August 6, 2010 at 3:14 pm # Reply

    Unless mortgage forgiveness is unilaterally administered to homeowners regardless of loan-to-value, I hate the idea of mortgage forgiveness to just a select group of homeowners. It just doesn’t seem fair or equitable.

    I have an alternative solution to kick start the economy. Why not provide debt forgiveness on the negative equity that most Americans incur on their vehicles as this would be a great help to homeowners and non-homeowners alike.

  4. Alex Cortez August 6, 2010 at 8:30 pm # Reply

    Sure, I’m all for helping those in need. But how much more government intervention do we need? Many people who are now in trouble made financially unsound decisions to get into homes they couldn’t afford to keep. That was a clear and conscientious decision. So what about those who could have gotten the crazy no-doc loans but chose not to do so because it was the financially prudent thing to do? No they are renters, but as taxpayers will end up subsidizing homeowners who made unwise decisions. This smells like politics, politicians merely playing their cards so they can look better come election time. Let the free markets correct themselves and only then will we see long-term sustainable stability and growth.

  5. Carole Sanek August 7, 2010 at 5:42 pm # Reply

    We bought our home in 2005 for $204000 we put $100,000 down we owe $95000 and it’s worth about that. So we lost our cash investment and it sucks. Now we are on social security and hoping for real estate sales in the gulf coast where people think we have oil – we don’t. No oil down the gulf coast of Florida and I do eat seafood from the Gulf. If things do not turn around soon we will expat in Panama – we have already looked seriously into that and what’s sad is many people can’t afford to live nicely elsewhere either. I really feel like it is the Great Depression all over again

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