A recent government report reveals the Obama administration’s foreclosure prevention plan is a non-starter. Designed to induce loan servicers to grant loan modifications for homeowners with negative equity, the plan has only succeeded in providing modifications to 9% of delinquent homeowners. This falls far short of the administration’s goal of 500,000 loan modifications by November 1, 2009. The report also includes information on which servicers are granting modifications, in an effort to scold and hold accountable those who are not. Lenders, however do not see the government inducement as much of a carrot to encourage them, and the new report is no stick to enforce its objectives. The linked article more comprehensively depicts which servicers are currently offering loan modifications, and which, in their own best interests, have elected not to.
first tuesday take: Readers must realize that there is more than meets the eye when discussing the rules of loan modification packages. For instance, the Obama foreclosure prevention plan offers no incentives for a lender or homeowner to modify when the home is 125% overencumbered (a 125% LTV), called a negative equity (i.e., all Californians with mortgages originated after 2001 at maximum LTVs).
A better option for homeowners with negative equity is simply to exercise their put option in purchase-assist mortgages and leave the dead-end investment behind with the lender without any personal liability whatsoever. Homeowners who choose to hang on to homes with even 1% negative equity will face a continuing excess debt burden for approximately the next six years: a heavy and unorthodox price to pay for a failed attempt at homeownership. A fresh start would be better for the homeowner, better for society, better for the recovery of the economy, and much better for brokers and agents.
If modifications do occur without a loan cramdown to 90-100% of the home’s present fair market value (FMV), then the trust deed must be modified to delete the due-on clause before the loan is brought current (at the least, the deed must be modified to protect the lender from insolvent buyers with a predisposition for arson). The homeowner will need the maximum ability to resell his home in what will most likely be a troublesome market for mortgage money (and assumable loans).
For the moment, the probability of a quick real estate recovery seems bleak. Nothing is worse for future pricing and sales volume than government-supported asset prices—they led to the French revolution, Japan’s lost decade (the 1990s), and Mexico’s retreat into government ownership and operation of everything from airlines to banks and commodities (y mas, y mas, y mas) between 1980 and 1990. Real estate prices today average one half of 1990’s prices.
For a California real estate recovery to occur, as it inevitably will, property values must be set by the market, and that means they must be set by real estate brokers, not bank asset managers and government fiat.
Re: “Obama mortgage rescue: Only 9% getting help”, from CNNMoney.com