Bailouts, Bailouts , and more Bailouts
Politics, Bailout News, The Economy, Real Estate November 14th, 2008
Oh, yes. Another bailout proposal. This time from the FDIC.
FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications
Background
Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow (around 4 percent of seriously delinquent loans each month). It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.
Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments to as low as 31% of monthly income. Modifications are based on interest rate reductions, extension of term, and principal forbearance. A loss share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification. The FDIC would be prepared to serve as contractor for Treasury and already has extensive experience in the IndyMac modification process.
Basic Structure and Scope of Proposal
This proposal is designed to promote wider adoption of such a systematic loan modification program:
- by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and
- sharing up to 50% of losses incurred if a modified loan should subsequently re-default
We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan.
Details on Program Design
- Eligible Borrowers: The program will be limited to loans secured by owner-occupied properties.
- Exclusion for Early Payment Default: To promote sustainable mortgages, government loss sharing would be available only after the borrower has made six payments on the modified mortgage.
- Standard NPV Test: In order to promote consistency and simplicity in implementation and audit, a standard test comparing the expected net present value (NPV) of modifying past due loans compared to the strategy of foreclosing on them will be applied. Under this NPV test, standard assumptions will be used to ensure that a consistent standard for affordability is provided based on a 31% borrower mortgage debt-to-income ratio.
- Systematic Loan Review by Participating Servicers: Participating servicers would be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard NPV test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.
- Reduced Loss Share Percentage for “Underwater Loans”: For LTVs above 100%, the government loss share will be progressively reduced from 50% to 20% as the current LTV rises.1 If the LTV for the first lien exceeds 150%, no loss sharing would be provided.
- Simplified Loss Share Calculation: In order to ensure the administrative efficiency of this program, the calculation of loss share basis would be as simple as possible. In general terms, the calculation would be based on the difference between the net present value of the modified loan and the amount of recoveries obtained in a disposition by refinancing, short sale or REO sale, net of disposal costs as estimated according to industry standards. Interim modifications would be allowed.
- De minimis Test: To lower administrative costs, a de minimis test excludes from loss sharing any modification that did not lower the monthly payment at least 10 percent.
- Eight-year Limit on Loss Sharing Payments: The loss sharing guarantee ends eight years of the modification.
Impact of the Program
The table below outlines some of the basic assumptions behind the scale of the plan and its expected costs.2 To summarize, we expect that about half of the projected 4.4 million problem loans between now and year-end 2009 can be modified. Assuming a redefault rate of 33 percent, this plan could reduce the number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion.
1 Current LTV can be demonstrated by a Broker Price opinion, or BPO.2 Note: These figures have been updated from previous summaries to reflect a narrower application of the program to non-GSE loans that become delinquent through year-end 2009.
November 15th, 2008 at 3:18 am
The proposed economic bail-out plans are the biggest lies ever!
It only puts the money into the pockets of so very few, and then to get it into all sectors of the economy, is to have them loan it to you, with interest of course.
A fast (and short term) sure fire way to jump-start the whole economy might be as simple as this. That is, to put the cash into the system by giving each and every registered voter hundred thousand dollars, and let them spend it, any way they want! Most will bail themselves out of their own mortgage and debt issues, repairs or remodeling, some will invest it or pay off their college loans or even go to college, some will start a small business, others will buy themselves a new car, or two, and many will just spend it on things they need or stuff they don’t really need anyway. Either way, the assets will flow into and throughout the whole economy way faster.
Besides, it will cost less than the 700 billion that they are wanting, and Everybody will benefit from it anyway. Not just the bankers and loan sharks.
Other steps that could be taken.(long term).
Repeal NAFTA, and charge appropriate taxes to foreign entities on imported goods. Free trade, is not free.
Stop taxing lower and middle class to death, and make upper class pay all their fair share of taxes (no loop holes or tax brakes).
Charge extra taxes (and/or no loop holes and tax brakes) to companies that out source jobs to foreign countries.
And make big oil lower prices and/or pay all their taxes (no loop holes or brakes) on profits.
We have plenty of our own oil, lets use it, and not need be controlled by OPEC or foreign entities.
Invest in alternative energy and garage inventors. (There are some great ideas out there that are not getting any respect)
November 15th, 2008 at 1:35 pm
Fool me once shame on you. Fool me twice shame on me. Seems like the Chinese had it right. When has the government managed anything well?
In this crisis we all were sold a plan that you help the individual home owner. Then they scrapped the plan after they contracted the firms PricewaterhouseCoopers and Ernst & Young until 2011 to manage the mortgage buy backs.
We are just a naive population. If a politician promises any for of tax cuts we vote for them. Look at the exit polls if you don’t believe me.
http://nomedals.blogspot.com
November 21st, 2008 at 5:19 pm
Everyone seems to agree that flooding the market with empty, foreclosed homes does not help neighborhoods maintain stability – either as a way of living, or regarding the value of homes. Empty homes do nothing for a neighborhood.
Recently some organizations are taking tentative steps to allow homeowners who are defaulting on their mortgage to remain in their homes –at least for the time being.
Fannie and Freddie Mac have announced that they are freezing foreclosure sales until after the new year while they review strategies and the future of their organizations. J.P. Morgan Chase & Co. and Citigroup Inc. recently announced foreclosure-prevention programs that aim to reduce interest rates, extend repayment schedules and, in the case of Citigroup, reduce loan amounts, to help borrowers keep their homes. But the programs have focused primarily on loans wholly owned by those companies because they feel they have more authority to rework those mortgages.
HSBC is also making more options available to more people. For example, it is contacting customers before their adjustable-rate loans reset to higher rates and freezing the current rate or allowing the borrower to pay a rate below what the new rate would be. The bank also is lowering fixed rates for selected borrowers. All this in an effort to stave of foreclosures.
One way of stabilizing markets where supply exceeds demand is to regulate supply. That way the people who can buy homes can buy from sellers who can’t afford to stay in their current home. But, amazingly enough, new home construction is still going on – even in saturated markets. Merrill Lynch economist David Rosenberg suggests, only half-jokingly, that the Treasury should impose a moratorium on home building. “It sounds like lunacy, but we have to destroy the housing capital stock to help put a floor under the market,” he said.