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:

A formula for debt forgiveness

The inconsistent cramdown policy

Re: “Fannie Mae, Freddie Mac to offer streamlined loan modifications” from the Los Angeles Times