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What's really going on is the banks and other financial institutions that are stuffed with sour-MBS, are getting ready to dump their toxic sludge in the new government landfill, also known as FHA. Here's a clip from Housingwire which explains how the program works:
Here's an example of how the program will work for underwater homeowners:
If the homeowner is current on mortgage payments, they'll be allowed to refinance into a FHA loan amounting to no more than 115 per cent of the home's current value. So if the current mortgage is $400,000, but the home is now worth $300,000, the maximum of the new FHA mortgage would be $345,000. The difference between the old and new balance would gradually be forgiven if monthly payments are made for the next three years.
The process provides ample opportunities for fraud. For example, if the banks manage to wrangle a higher appraisal on the homes, then they can cut their losses significantly. It just requires rigging the system so the appraisal doesn't reflect the true market price. No problem.
The program also allows homeowners with poor credit scores (FICOs in the 500s) to convert into FHA loans. That means more losses for taxpayers.
And -- as stated above -- the borrower will be able to secure a FHA-guaranteed mortgage in the amount of 115 percent of the value of the house. (15per cent more than the current value of the house) This flies in the face of everything we have learned from the subprime crisis, which is that the main driver of foreclosures is the lack of equity. In other words, when people who have no equity,(no material stake in the home, like a down-payment) they tend to default faster than any other category of borrower. The Treasury is bent on repeating the mistakes of the past.
Nearly 25 per cent of U.S. mortgage holders (11.3 million households) are currently underwater on their loans. Almost 6 million are behind on payments or in some stage of default. Unemployment is nearly 10 percent, underemployment is 20 percent (according to Gallup) and, according to many experts, the banks are holding another another 3 to 4 months of "shadow inventory" off the books. Realistically, housing could be in the doldrums for another 5 or 10 years. We need people at Treasury who take the problem seriously and not bank lobbyists and industry agents who merely go from one stealth bailout to the next.
Mike Whitney @ http://www.counterpunch.org/whitney03312010.html
"Under the terms of the voluntary program, lenders will be required to write down at least 10per cent of the mortgage principal for borrowers who are current on their payments.... The principal reduction must bring the new FHA loan to value (LTV) to 97.75per cent and make the new payments account for 31per cent of the borrower’s monthly income. The program also offers incentives to lenders who offer borrowers with second lien mortgages similar principal reduction and refinance options. The maximum allowed LTV of the combined loans is 115per cent ." (Housingwire)
Think of it like this: 31 per cent of a monthly unemployment check is much less than a house payment and even lower than most rental payments. It's a giveaway to keep people in their homes to slow the rate of foreclosures, and avoid more red ink. This keeps inventory from stacking up, which keeps housing prices artificially high. It currently takes 14 months to complete the foreclosure process, which proves that the banks are deliberately dragging their feet because they can't take the losses. Until a foreclosure finalizes, the banks can fudge the numbers with "mark-to-fantasy" accounting tricks. But when the transaction is complete, the bank has to write down the loss on its books. And that's the problem. If they process the foreclosures too fast, their capital cushion will dwindle, and FDIC will shut them down. That's why they're stretching out the process until Treasury gets its program up-and-running. Here's an example of how the program will work for underwater homeowners:
If the homeowner is current on mortgage payments, they'll be allowed to refinance into a FHA loan amounting to no more than 115 per cent of the home's current value. So if the current mortgage is $400,000, but the home is now worth $300,000, the maximum of the new FHA mortgage would be $345,000. The difference between the old and new balance would gradually be forgiven if monthly payments are made for the next three years.
The process provides ample opportunities for fraud. For example, if the banks manage to wrangle a higher appraisal on the homes, then they can cut their losses significantly. It just requires rigging the system so the appraisal doesn't reflect the true market price. No problem.
The program also allows homeowners with poor credit scores (FICOs in the 500s) to convert into FHA loans. That means more losses for taxpayers.
And -- as stated above -- the borrower will be able to secure a FHA-guaranteed mortgage in the amount of 115 percent of the value of the house. (15per cent more than the current value of the house) This flies in the face of everything we have learned from the subprime crisis, which is that the main driver of foreclosures is the lack of equity. In other words, when people who have no equity,(no material stake in the home, like a down-payment) they tend to default faster than any other category of borrower. The Treasury is bent on repeating the mistakes of the past.
Nearly 25 per cent of U.S. mortgage holders (11.3 million households) are currently underwater on their loans. Almost 6 million are behind on payments or in some stage of default. Unemployment is nearly 10 percent, underemployment is 20 percent (according to Gallup) and, according to many experts, the banks are holding another another 3 to 4 months of "shadow inventory" off the books. Realistically, housing could be in the doldrums for another 5 or 10 years. We need people at Treasury who take the problem seriously and not bank lobbyists and industry agents who merely go from one stealth bailout to the next.
Mike Whitney @ http://www.counterpunch.org/whitney03312010.html
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