Will the automatic loan mod program bolster the real estate market?
- No (74%, 52 Votes)
- Yes (26%, 18 Votes)
Total Voters: 70
The Federal Housing Finance Administration (FHFA) is modifying your loan, whether you like it or not!
Under this new program to “streamline” loan modifications, any loan owned by Fannie Mae or Freddie Mac (Frannie) will be automatically modified if the loan is:
- at least 90 days delinquent;
- no more than 24 months delinquent;
- at least 12 months old; and
- has a loan-to-value ratio (LTV) of 80% or more.
Frannie will automatically modify interest rates on portfolio loans that meet these standards to half a percentage point higher than the current conventional loan rate. The term of the loan will be extended to 40 years. Monthly payments will be reduced by an average of 30% under these terms, according to FHFA officials.
The automatic modification program makes no mention of the highly debated cramdown or principal reduction policy that FHFA Director Ed DeMarco so vehemently opposes. Instead, this loan modification program works on the same logic as all prior failed government home loan programs: lower the interest rate, extend the loan term, lower monthly payments.
first tuesday insight
The FHFA seems to think they can just keep putting Band-Aids on the gaping negative equity wound.
This program is of the archetypal extend-and-pretend variety. Just lower the monthly payments so suffering homeowners can make reduced payments on their upside down mortgage with their unemployment checks.
We’ve been railing against the extend-and-pretend loan modification programs since HAMP was launched in 2008. These programs have multiple deleterious effects on the economy and the housing market. Real estate sales volume pays the price of the government’s refusal to require lenders to mark loan balances down to market values – the cramdown math.
In a perfect world, lowering a homeowner’s monthly payments aids our consumer economy. That’s right: the more we consume, the more our economy grows. A homeowner freed of unwieldy mortgage payments is able to spend their disposable income on consumables, setting off a virtuous cycle.
With the current income disparity, unemployment levels, consumer debt ratios and zero-bound interest rates in the U.S., any savings garnered from an automatic loan modification will likely be put towards paying down credit cards or student loan debt. Unfortunately, home sales and relocation will take a back seat to personal debt deleveraging for several years.
This says nothing of the crippling employee mobility problem in our economy. Owners with negative equity are chained to their homes at a time when our regional economy demands a nimble workforce.
However, with 40-year loan terms and negative equity keeping homeowners from selling for a decade or more, many job seekers are left to languish in the suburbs. Meanwhile the high-paying jobs are awarded to the educated and highly mobile urban renters.
Must we say it again, and again, and again? Cram down principal loan balances and get the real estate sales market off of short sales, and moving again! This will benefit job growth, innovation and incomes as well.
It won’t happen as long as DeMarco is left to his despotic reign of housing demagoguery. We stand with California Attorney General Kamala Harris on this: fire DeMarco now!
Related articles:
Re: “Fannie Mae, Freddie Mac to offer streamlined loan modifications” from the Los Angeles Times
As I see it, not allowing people with variable rate modified loans the ability to refinance now is plain stupid. When their payments skyrocket they’ll default all over again and cause another market squeeze. People would rather refinance now at a higher rate then there paying just so they don’t have to experience the final rate increase, at least 2.5% higher then they are, immediately after they received there modified loans.
I am in favor of free house for everyone. Sales people keep selling but no commision. They just do it out of the goodness oft their hearts. That shopld really motivate a lot of people. Right?
The new FHA modification is not a perfect solution, not a solution for everyone, but a workable solution for many! It may keep an underemployed homeowner afloat for the next 5 years, when the market has improved enough to refinance or sell!
I applaud the FHA for this compromise!
Once again, the current administration and their idea-logs have the attitude that if they keep doing the same thing over and over again, they will end up with different results. (Isn’t this the definition of insanity?)
As long as the public (Lame stream media), keeps lying to the public about the wonders of this administration they will continue trying to pull the wool over everyone’s eyes!
Meanwhile, foreclosures will continue to back up and the real estate market will continue to limp along! Watch out for HYPER-INFLATION and when it hits it will make the high interest rates of the eighties look like a cake walk!
What would make Fannie Mae/Freddie Mac think that a 20-30% reduction in payment will make it any easier for an unemployed borrower or someone who can’t stop borrowing more than they make the payment?
And why would a borrower still want to hold on to their home that is 175% LTV upside down/underwater with only a 20-30% reduction in payment? And ruin their credit to achieve that?
What so few borrowers will realize is that the payment will be lower but they will actually pay MORE in interest because the term is stretched to 40 years. Who benefits when a borrower pays more interest? The big box banks.
And, with it being a 40 year term, that means even less of their monthly payment will be applied towards the principle loan balance AND this means it will take even longer to build equity!
Have the GSE’s not learned anything about the incredibly high default rate on a loan that has been modified by a borrower/homeowner in financial distress?
Fannie/Freddie should be required to disclose side by side how this will cause the borrower to pay more in interest and reduce how quickly they build equity and keep them underwater longer.