It's hard to let go
Of all that we know
As I walk away from you
Hurled from my home
Into the unknown
As I walk away from you
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
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
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.