Monday, April 16, 2007

"The foreclosure fighters"

The LA Times yesterday ran a column on the "how" of proposals for borrowers going under. The most meat was at the end (emphasis added):

One option that is gaining significant attention would work like this: Borrowers in serious default would be refinanced into government-insured or guaranteed fixed-rate programs such as FHA, VA or rural housing. If their loan balances exceeded FHA statutory limits, the refinancings could be provided through Fannie Mae or Freddie Mac.

The initial balances on the new mortgages would be what the borrowers could afford to pay using their current incomes at market rates. Any shortfall between the amount of the new loan and the balances owed on the unaffordable previous loan would be recast into a "soft" second lien — a second mortgage or deed of trust carrying a minimal or zero interest rate and no monthly payments. The second lien would be due and payable in a lump sum at any subsequent sale of the property, or whenever the borrowers could afford to retire the debt.

Credit risks on the soft second mortgage would be shared by Wall Street bond investors, the federal government or other mortgage market players.

The concept wouldn't keep everybody out of foreclosure, nor would it be extended to people who inflated their incomes or bought properties they could never afford.

But it could be one answer for the payment-shocked sub-prime borrowers who simply got in over their heads.

The devil is in the details of who qualifies and at what payment level. It also reminds me of Japanese banks stringing out non-performing loans rather than taking their losses during the 1990s, which only dragged out their decline.

See also Bloomberg's Mortgage Bondholders May Bear Subprime Loan Risk" (via Theroxylandr).


Craig said...

So maybe we should all go out and try to get a bank or broker to "take advantage" of us and give us a teaser rate loan or something and then we can buy all the house we want and get bailed out...oh wait, I pay all my bills on time and have no debt...I couldn't be classified as a subprime borrower even if I about a backwards concept

Mike said...

i give it about a 1% chance of being passed. regardless it's stupid and the moral hazard it introduces into the market is significant. it would cost a fortune, artificially keep home prices higher than they should be and prolong the recovery from the whole debacle. no bailouts. just got to rip that band-aid off!