Brother, Can You Spare a Home?

Last week, the Federal Housing Finance Authority (FHFA), which has the esteemed position of regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks, suggested a plan to assist homeowners. The agenda of keeping folks in their homes will not be fully accomplished with this program, but in Washington, honorable mention sometimes feels like a blue ribbon.

The program, called the "streamlined modification program" asks mortgage servicers to modify existing loans for borrowers to get payments on first mortgages down to 38 percent or less of their monthly gross income. It is suggested that servicers lower interest rates, extend terms or defer required payments in order to achieve this objective.

Hurdles to qualify include: missing at least three mortgage payments, occupying the property as a primary residence and not filing for bankruptcy. Of course, the loan must be a Fannie or Freddie loan to begin with, but the kicker is that borrowers must certify that they "experienced a hardship or change in financial circumstances, and did not purposely default."

Sounds good, right? Only a few problems exist, including the following. Fannie and Freddie, while accounting for about 58 percent of total mortgages, only account for about 20 percent of serious delinquencies. So, right off the top we know this solution will accomplish little toward addressing the problem in the market as a whole.

In addition, showing "hardship" and proving one does not "purposely default" are subjective at best. Will we create a review board with the power to determine case-by-case who is experiencing a hardship? Will that individual's personal life decisions determine if they've experienced a hardship or if their current circumstance is simply a result of their own poor decision making? Anyone who has ever dealt with their local city council or school board will immediately see the potential for abuse of power here.

Third, and most important, why is this authority given to the loan servicers as opposed to the lenders? Ah, because the "lenders" are mortgage conduits - nameless, faceless entities who can surely take some of the blame for the state of the mortgage market.

Unfortunately for the populace, they are the "lenders". After all, who holds mortgage securities but pension funds, endowment funds, charitable foundations, and, yes, even 401(k)s? The only good thing is most people don't scrutinize their own investments closely and are much quicker to criticize the investment choices of others without realizing the enemy is within.

A more appropriate solution is to simply pay off the current mortgage holders at par and create new loans for whoever qualifies (certainly subjective requirements need to be eliminated). This would provide a much cleaner path to mortgage modification and at the same time punish mortgage investors in the sense they will receive their cash back today with limited investment choices at similar mortgage yields. Changing the rules after the game is in progress will discourage future investments in the mortgage sector - something we cannot afford today.