The ink on the new housing rescue bill isn't dry yet, but Washington is already leaning hard on regulators and mortgage bankers to get their full attention focused on it and act as soon as it goes into effect on October 1, 2008. If all goes as planned, it would help some 400,000 homeowners refinance their existing costly home loans into more affordable FHA programs. 400,000 seems to be a large figure. In light of that, RealtyTrac just released a report according to which almost 740,000 homes were mailed foreclosure-related notices in the second quarter of this year alone and now, all of a sudden, the 400,000 doesn't look all that much. Yet, it should give the market some sense of stability and that's probably what it is designed to do anyway.
Lenders must be now busily figuring out how to approach the bill's intentions and honestly, its success is very dependent on their readiness to go along with it. Their reluctance comes from the fact that they are asked to take a loss on the principal balance of potentially failing loans which then would be refinanced by FHA. Normally banks don't go that route. That's a no-no. But right now they just might do quite a few of these refinances because the real estate markets in many areas are losing value anyway.
For instance, Las Vegas properties have lost a good chunk of value recently and using the rescue bill's provisions might actually save the lenders money on loans they have here. If they let homes go into foreclosure in Las Vegas and then sell them in the slow marketplace would in all likelihood cost them much more than if they would write off a smaller portion right now and let FHA do the rest. The same goes for other hard-hit areas like Arizona, California and Florida. Therefore, the banks are probably going to concentrate, at least to start with, on these states. It still boils down to a business decision, so doing refinances in the these four states will mean minimizing their losses.
The regions where values have held up better are likely to see a much more tepid approach. In most cases it probably becomes a toss-up between using the bill's terms and foreclosure. Either way the loss amount is about the same, so it's anyone's pick.
There is a feel that the bill's aim is to guide the battered areas out of the weeds as soon as is practical and hope that the better-off real estate markets can more or less do it on their own.
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Esko Kiuru
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Esko,
Thanks for the post. Unless I am missing something, I don't see much choice for the lenders. Most aren't equipped to address the challenge brought on by the voluminous number of short sales and foreclosures.