Friday, October 3, 2008

The Bailout ("TARP") - What Does This Mean To Us


In the last several posts, I have tried to explain what has happened, and how it happened, to the finance markets, especially residential lending. What I will try to do here is show what it means to us now, and in the near future.


Congress has given $700 billion to the financial industry to help them stave off a meltdown o the U.S. economy. Maybe it will work or maybe it won't; time will tell. What is being done for our friends, neighbors, co-workers ad all of the others who are facing foreclosure NOW - NOTHING! Well, that may be a bit harsh, but only a bit. There are no programs being established to ACTUALLY slow the pace of foreclosures, except on a state by state basis, if at all. And, those programs are just giving additional time to homeowners to try to get the current holder of the mortgage or the servicer or the Pooling entity to modify the individual mortgage. If you have read this Blog, or just followed the news, you will have concluded that the process is not working on any reasonable scale.

We must have a change in the MBSs to permit them to make the best deals possible so as to avoid taking homes. We must hold mortgage brokers, lenders, appraisers, and borrowers accountable for their actions. But, we have to help save homes. The 4 letters hated by banks and other mortgage lenders are O-R-E-O, which stands for "Other real estate owned" - foreclosed property held by the lender. Those houses do not earn money, in fact that eat it -fast. Banks and other lenders are all about money, not houses.


The bill as passed will subsidize losses suffered by the Mortgage Backed Securities by buying these "bad assets", and therefore subsidizing the major investors in them. That is not all bad as many 401ks, pensions, IRAs and just investments made by everyday people, as well as investment house company giants. Unfortunately, this translates to "when people cannot afford their mortgage payments, regardless of why, and the loan is considered "bad" (technically both in default and "non-performing") the government will do nothing to help the homeowner, but will buy the bad loan. Are there any provisions to rewrite bad loans? NO! Will the securities that own 2,000 loans in one MBS, "too many" of which are bad, try to work-out the problems and modify the terms of the mortgage? NO! Will Foreclosures stop or even stop? NOT NECESSARILY! The are no provisions in the bill for any help for homeowners in trouble.

In fairness, by the time Congress paid attention to the issues, something had to be done to stop the economy from dropping further. However, the only real mandate that will deal with consumer finance issues, specifically mortgages; For companies in the government program, Secretary of the Treasury Paulson will be required to implement a plan to encourage lenders to modify mortgage loans through existing federal home-ownership programs.

One alternative would have been to have HUD or FHA guarantee the loans that comprised the MBSs. If the homeowner-borrower could make the payments of a 30 year fixed rate mortgage, for the current market value of the property, at 6% interest, then that loan is re-written, brought current, and put back into the portfolio. The losses would be quantified and the average citizen in trouble would be helped.

The way things are set now, a number of my clients face a huge uphill battle to save their homes. One, a 60 year old, single, 32 year experienced teacher in a local parochial school, had to file bankruptcy to save her house. The loan, now part of a MBS, has an interest rate that adjusts every month. The disclosures showed that her payments stayed the same each month for each 12 month period with payments increasing once a year, but only by 7%. A $600 payment could only increase $42. The interest kept building though. At the end of the first year, she owed $4,500 more than she borrowed. Her payments stayed moderate until the 43rd month when the jump would go from $700 per month to $1,400.30 per month. The loan will be considered "bad"; the MBS will get its money from the bailout; my client, the homeowner will lose her house. The bankruptcy, a last resort will allow the removal of a second mortgage that was put on based on a fake value, by inflating reality $30,000. This client literally had no clue about what was happening. She went to a broker, got a loan, was lied to, and now the broker just wants to say, well we can probably appraise it higher and rewrite the entire amount into a new loan. No modification, in fact, no return calls from the lender's legal counsel.

Another client also got a loan based on a quick sell and no information. The loan was a "full documentation loan" meaning that the lender has tax returns, W-2s, a full and accurate application, and an appraisal commissioned by the broker. The adjustment of rate was disguised because of the way the disclosures for ARMS are allowed to be completed. Although payments could double within 3 years, the Truth in Lending Disclosure showed a mere .375% increase, or $49, over the entire 30 year period. The response to a call to fix the obvious misrepresentation, and unfair and deceptive practices,was to tell me that "This cannot be modified. This is part of a Pool and the modification is not permitted". While I await a copy of that agreement, my client is pending foreclosure. Oh, and by the way, this client was NOT a sub-prime borrower. Her credit score exceed 710

Hopefully, all of these issues about which I have written so far, have been made a little clearer to you, the reader. The analysis will continue, trying to make complicated financial issues understandable. Comment, suggest, criticize if necessary.

author's copyright by Richard I. Isacoff, Esq 2008

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