In July of this year Congress passed the Housing and Economic Recovery Act of 2008.
In addition to the Wizards of Washington removing down payment assistance programs, they passed legislation that was supposed to provide a framework that would allow borrowers to refinance out of their current adjustable rate mortgage and into a 30-year fixed rate, FHA insured loan at 90% of the current value of the property.
The one small caveat being that the current lender had to be willing to write down the principal on the original loan to make this happen.
This proposal was ill thought out for three reasons. The first one being that lenders are not going to want to voluntarily write down principal, especially when there is the perception that the government may actually use TARP money (don't get me started on TARP) to purchase some of these mortgage securities.
And even if you take TARP money out of the equation, is it worth the lender writing down loan principal on all of their loans in order to prevent a relatively small default rate?
Second, this proposal assumes that the borrower could even afford a new FHA 30-year fixed rate mortgage as opposed to the teaser rate that they originally purchased the property with. There is a reason why they didn't use this type of financing in the first place, they couldn't afford it.
Third, in many cases, it is impossible for the loan servicer to make any decision about this type of loan modification or principal write down because they don't own the loan. A lot of these loans were packaged and sold off in the secondary market making it impossible to negotiate directly with the company that owns the loan.
Well, to no ones surprise but maybe those in Washington, according to a recent blog post by CNBC's Diana Olick, since the start of the program on October 1st, the FHA has received 111 applications.
The hope was that 400,000 loans could be renegotiated over the coming years per this piece of legislation.
Now, maybe this Hope for Homeowners program can get some traction, but the initial results is that this too has been a complete waste of legislation. And the thing is, as property values continue to decline, the success of this program is likely to become even more challenged as the mortgage holders will be forced to write down even larger sums of loan principal.
And so homeowners continue to get sent to the slaughter house and Wall St. firms continue to eat from the pig trough.
Here's an idea: www.ItsTheHousingMarketStupid.com
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