Fannie And Freddie’s New Plan Keeps Borrowers Underwater In Neg-Am’s & Teasers

The great new and improved big plan to save the housing sector involves giving 40-year terms, adding balances to the end of the loan and offering teaser rates.  IT WAS THESE EXACT PRACTICES THAT GOT US HERE IN THE FIRST PLACE! They were called ‘interest only’ and ‘Pay Option ARMs’.

This ‘new’ program is nothing new at all. It is simply an aggregation of a bunch of stuff brought forth previously that just makes everyone renters. The government’s new plan of reducing rates, extending terms and allowing negative amortization is being done primarily to keep borrowers from walking and renting by competing with rentals.

Why walk from your home when you can essentially rent your own home for the same? That is what the government is banking on. But in doing this the borrower stays underwater and highly leveraged. It’s sad when it takes reducing rates to 1-2% to get the borrowers to be able to afford their mortgage. It highlights just how over-leveraged the housing system is.  If this new program is widely adopted and successful, it ensures lost future DECADES for housing.

This new plan certainly does not instill any confidence in new buyers because it makes everything much more opaque. It makes true valuations much more difficult to derive.

This plan does not solve the problem - that home owners are hopelessly underwater and over-leveraged to their home. They can’t sell or refi.  In turn, they are making a wise financial decision and walking away. Negative equity cuts across all loan types and borrower demographics.

Another main problem is that the borrowers have to produce income documentation. Remember, in the Alt-A universe 83% of all loans were limited documentation (stated income).  In the Subprime universe 55% were stated income and in the Prime world, some 35% were limited documentation.  How many that lied on their original loan application will be willing to give the real information now?

Additionally, by the time borrowers have missed so many payments they have been beat up by the lender for months. Many just give up and don’t care anymore. You would be surprised how hard it is to get borrowers to help themselves even with massive principal balance reductions, which are not being offered through the program to the best of my knowledge.

It is impossible to quantify, but I still maintain that programs that do not address the root problem will promote bad behavior by good borrowers looking to benefit. There are millions underwater in their property perfectly able to make their payments that may chose to default as a means to better their balance-sheet.

Today’s hype was just that - a non-starter ’solution’ that ultimately turns home owners into leveraged renters because banks refuse to reduce the principal balance.  Until principal is waived for good, no solution will work.

My advice to regulators and banks…

Subscribe by RSS Subscribe by Email