Here in America, we’re keeping a dream alive: Foreclosures can be avoided if only we help struggling homeowners out with their mortgage payments for a while.
Unfortunately, most of the programs we’re using to do this thus far just aren’t working, in part because they don’t get at the root of the problem.
The problem that most of America’s 15 million underwater homeowners face is NOT temporary difficulty making payments. It’s a mountain of debt taken on to pay for an asset whose value has since plummeted. If we want to take the pressure of these homeowners, we need to restructure the debt, not just the payments. Specifically, we need to drastically reduce the amount of principal owed, so that the debt constitutes an acceptable percentage of the current value of the asset.
For example, if a house cost $500,000 and the homeowner borrowed $450,000 and the house is now worth $350,000, the debt needs to be reduced to $300,000. Doing that will produce a $150,000 loss–akin to the losses that have been sustained by creditors who lent money to Chrysler and GM. The bank either needs to take that loss outright, or it needs get a share of the resulting equity in the house, so that it can recoup the loss in future years when the house is sold (hopefully at a higher price.)
That is how mortgage modifications need to work if they are to actually relieve the debt burden on American consumers. Unfortunately, our programs aren’t doing that yet. And here’s an article from Housing Wire with an update on how some of the programs we ARE using are working:
A program aimed at helping delinquent borrowers become current once more on their mortgages will likely see decreased volumes at mortgage giant Fannie Mae (FNM: 0.7673 -1.63%) after the Federal Housing Finance Agency (FHFA) noted a significant majority of participants soon redefaulted after receiving aid.
Fannie first launched the HomeSaver Advance (HSA) program in February ’08 as a solution for borrowers experiencing temporary hardship. It allows servicers to offer unsecured, personal loans so delinquent borrowers can keep up on payments until the temporary hardship — unemployment, sickness, etc. — passes and borrowers can resume regular payments.
But as mortgage performance deteriorated through ’08, Fannie’s conservator, FHFA, noticed an alarming trend among the mortgages participating in the advance program.
“HSA is showing high redefault rates on the early offerings,” FHFA director James Lockhart noted in a Congressional report this week. “Performance on the February through April offerings shows a redefault [or recidivism] rate of almost 70%, which calls into question the program’s assumptions that borrowers have the capacity to make payments going forward.”
Of course, even if we get mortgage-mods right, we’ll still be up the creek for a while. With an estimated 20% or more of US households likely to be underwater by next year, even a massive mortgage-mod program will still be a drop in the bucket.