The Underwhelming Frannie Loan-Mod Plan

The Frannie loan-mod plan has arrived, and it's not particularly exciting. Among the more obvious problems:

• It applies only to mortgages owned by Frannie (FRE and FNM), which means, by definition, that it doesn't include subprime mortgages. FHFA is trying to apply moral suasion -- but no cash -- to persuade other mortgage holders to adopt the same plan. Good luck with that.
• It doesn't even begin to address the problem of mortgages which have been securitized, rather than being held by a single bank.
• It's based on the idea that servicers "have dedicated personnel who are experienced in working with borrowers who are struggling with finances, but who are eager to keep their homes". Not nearly enough of them, they don't.
• It requires borrowers to be 90 days delinquent -- and therefore gives many borrowers with mortgages over 38% of their gross monthly income a massive incentive to cease making any mortgage payments now.
• The onus is on the borrower to initiate proceedings, providing a package including "monthly gross household income, association dues and fees, and a hardship statement". For $800 per mod, servicers aren't going to be proactive about helping get this kind of thing done, especially given how overworked they are already.

In a quite extraordinary turn of events, FHFA director James Lockhart said in his statement that "we have drawn on the FDIC's experience and assistance, and have greatly benefited from the FDIC's input", yet the FDIC's Sheila Bair then turned around and released her own statement, saying that the plan "falls short of what is needed to achieve widescale modifications of distressed mortgages".

Clearly this is not going to be the last word when it comes to government attempts to help stabilize the housing market. It's probably going to be the last word until January 20, though; after that, Bair might find Treasury and the White House more amenable to her ideas.

Comments

[AnonymousAlso:]

"The resulting Fannie Mae MBS carries a guarantee of timely payment of principal and interest to the investor, whether or not there is sufficient cash flow from the underlying group of mortgages."

What is the effect on the MBS holders? Who makes up the difference?

2008 Nov 11 07:05 PM

[Steven Hansen:]

this is a band aid - a political motivated process to show the government is trying to help. i personally think this program will have a small effect on the housing market and foreclosures in general. but i could be wrong and would be willing to see if this could work.

i guarantee however, this kind of program will not stop the decline of housing values. there are soooo many loans so deeply underwater it is better for the borrowers to walk away.

unfortunately, those who opt into this program may still remain big losers. they are still being stuck with an asset which is declining in value. and in the future, we may see them having to visit uncle sams loan shop for another write-down.

2008 Nov 11 08:42 PM

[Smarty_Pants:]

Good money after bad.

But then it IS a gub'mint program.

2008 Nov 11 08:48 PM

[Obama is Bu...:]

These "assistance programs" are going to destroy the housing market.

No matter what alphabet soup government bureaucrats use to describe their latest stupid idea, they ALL boil down to this:

Tax the people who acted prudently and live within their means, and use the proceeds to reward the irresponsible and the foolish.

Even if these morons "stabilize" the housing market, what possible incentive do future home buyers have to behave economically or live within their means? heads, I profit from a government induced bubble market, tails I stick the losses on some poor schmuck who is stupid enough to play by the rules

2008 Nov 11 11:41 PM

[rm:]

[It's based on the idea that servicers "have dedicated personnel who are experienced in working with borrowers who are struggling with finances, but who are eager to keep their homes". Not nearly enough of them, they don't]

The servicing business makes about as much sense in this environment as selling Hummers.

When "nobody" was defaulting, it was great. But now that the business requires real work, there's not enough revenue to adequately staff, much less properly process the files.

If investors become willing to pay more in servicing fees, then the problem will be adequately addressed.

Meanwhile, they'd seen just exactly how their money HAS been managed over the last few years, I think they might have a stroke.

2008 Nov 12 12:48 PM

[jimmy46:]

The way to solve the housing crisis

IS TO STOP BUILDING NEW HOUSES.

In the last 5 years several million houses too many were built,
This surplus is the drag on the market.

MATCH SUPPLY WITH DEMAND.

2008 Nov 12 12:56 PM