Thursday, December 11, 2008

Homeowners & Mortgages & Foreclosures & TARP?


(Note: This post refers to earlier writings. You are urged to read those submissions)

This is one of those times when a confession is necessary: I have a subscription to the Wall Street Journal, in fact both print and online! Now, in ordinary times, I would not have even mentioned my reading habits but, as I have stated before, these are not ordinary times.

The WSJ has published two editorial pieces opining that the FDIC proposal to get funds to homeowners by modifying mortgages would cost more than the $24 billion originally estimated. The Journal cited Treasury Department and White House critics that are purported to have shown the actual cost could be as high as $70 billion. This is to save houses; to end the cycle of foreclosures and stabilize the economy. This, it was deemed, was too much to pay for stability in the marketplace. Here, the marketplace does not refer only to the real estate market, but, to some extent, to the securities market as well, and, in reality, OUR ECONOMY.

Remember the Mortgage Backed Securities that are being called "toxic assets"? The toxicity is the inability to value these interest bearing bonds, derived from mortgages (hence called "derivatives"). The entire market for MBS was based on the sales pitch, by Lehman Bros, Goldman Sachs et al, that HOMEOWNERS WOULD ALWAYS PAY 100% of their debt. That may have been true when, if there was a problem, the homeowner/borrower could meet with the LENDER, discuss the problem and work out a solution. Mortgages have become rare - they have become securities. There is no owner, no banker, no lender to whom you can ask for help and advice.

The FDIC proposed refinancing borrowers and maybe even paying the loan servicers, the entities that collect monthly mortgage payments and sent them to the investors. The idea is that the servicers have no incentive to do more than send bills, collect money, and pay the investors. The PSAs (see earlier posts) define, in extreme detail, precisely what Servicers can do. The investors want the interest that they were "promised" and they will not accept anything less. That attitude will get them far less than if borrowers pay most of what is owned, or perhaps 100% of what is owed but at a lower interest rate.

If the FDIC has it wrong, and the investors are not thinking clearly due to a near panic, what is the solution? Solution? What is the issue? FORECLOSURES. Whether the reason a homeowner facing a loss of his/her home is "at fault" for reaching beyond his/her monthly income, or if the reason is that the borrower was sold a loan product that was affordable for the first two years and then had the monthly payment jump hundreds of dollars, is DOES NOT MATTER; it is irrelevant. We have to stop the accelerating the loss of homes by foreclosures.

Elizabeth Warren, a noted Professor at Harvard School of Law, and the newly appointed head of the House Advisory Committee to Oversee TARP, has taken issue with the Treasury Department's cure-all of giving money to Banks as the magic pill. She is quite clear that, while that may be part of the answer, stopping foreclosures is the major step we need to take. Offering low interest rate mortgages for first-time homebuyers is great, but if the housing is continuing to drop in value because of the level of foreclosures, no one is going to buy now. Everyone will wait for the bottom which, as a result, gets lower and lower.

We need a balanced approach. Pass laws to allow Servicers to negotiate with mortgagor-homeowners who are in trouble. This means Congress has to take-on the very nature of the Securitization of mortgages and the resulting PSA contracts. Offer incentives for Servicers to do the extra work. Set up a new Federal Mortgage Corporation, similar to that from the 1930s to increase the accessibility to affordable refinancing for homeowners who can pay, but perhaps not at the higher rate that were sold.

There is no easy answer. There is no way for lawmakers to assure that they will be able to brag, at election time, that they "did the right thing". Congress cannot keep worrying about being re-elected and therefore afraid of offending the monied interests. It is time to help homeowners. Investors knew, or should have known the risks. Critics will argue that MBSs are in average workers 401K plans,and comprise a large portion of pension plans. Using an overused medical analogy, perhaps we had better not worry about the broken leg until we restart the patient's heart!

Author's Copyright by Richad I Isacoff, Esq -December, 2008

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