The US government (through Fannie and Freddie), Citigroup, JP Morgan, and others have begun offering homeowner bailouts, mostly in the form of renegotiated mortgages. The goal of these programs is to keep Americans in their houses, stop the decline of housing prices, and cost the banks less money.
Will these measures work?
In a word, no.
We’ll take the goals one by one. But first, let’s place the bailouts in context. Add up all the bailouts offered thus far and they cover about 1 million households (handy list below). About 7.6 million households are currently underwater and another 2.1 million soon will be. So that’s about 1 million households helped out of the 10 million soon to be in need (with millions more to follow). That’s about all you need to know.
As to the goals:
1. Will the bailouts will keep some people in their houses? Some people, but not many. Even after having their mortgages renegotiated, many of these folks will still be underwater. Many will also get fired or decide that it’s more important to spend the money on something else. Some of these people will decide to walk away anyway. Also, most of the bailouts (the Fannie and Freddie ones) affect only “conforming” loans, which don’t include subprime. So they will be no help there.
2. Will the bailouts stop housing prices from falling? No. To stop prices from falling, the supply of houses on the market has to shrink considerably AND consumers will have to have the capacity to take on new mortgage debt. It will be a long while before either of these things happen.
3. Will the renegotiations cost the banks less money? Yes. Foreclosing and selling now usually results in at least a 50% loss to the bank. Renegotiating mortgages, in most cases, probably costs less than that. It’s also a nice PR and customer-loyalty move. But, again, it will affect only a small number of households.
Homeowner Bailout Household Count (NYT)
The government’s announcement comes a day after the banking giant Citigroup joined a growing list of financial institutions offering to modify mortgages by unveiling a program to help thousands meet their monthly payments. About 130,000 customers are expected to qualify for the program, resulting in the workouts of over $20 billion of loans.
JPMorgan Chase, which acquired Washington Mutual and its troubled loan portfolio, announced plans in late October to cut monthly payments by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners. Bank of America, which acquired the large mortgage lender Countrywide Financial, announced a similar program aimed at 400,000 borrowers as part of a settlement with state officials a few weeks earlier. And HSBC ramped up its mortgage modification effort in January, and has adjusted 61,000 mortgages so far this year.
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