Treasury Foreclosure Bailout Plan Will Fail to Help Homeowners to Avoid Foreclosure
As I mentioned in my previous post on the proposed RTC plan to avoid foreclosure crisis, there is already a long list of players who want to buy distressed mortgage assets. So I wondered whether the federal government would end up paying more for these assets than the well-capitalized “vulture” funds.
As it turns out, Federal Reserve Chairmen Ben Bernanke admitted that they would be buying these mortgage pools at ”hold-to-maturity” levels… which means that they would be paying more than they’re worth.
So, if the Treasury pays patsy-level prices for these mortgages, then they’ve set themselves up for unnecessary losses from day one.
And as the losses pile up, at some point, the federal government will have to begin acting like normal portfolio managers, and work on maximizing the return on investment.
Just like a mortgage company, they’re going to have to look at each, individual borrower on a case-by-case basis, and see which homeowners they can squeeze some money out of, to help pay for the costs incurred assisting borrowers who need the more expensive interventions to avoid foreclosure.
So when we have radical groups like ACORN insisting that a virtual no-foreclosure addendum be added to this bailout, the principal challenge is reality. At some point, the good intentions of those who want to tie a reduction in foreclosures and an increase in favorable loan modifications will meet head-on with the real world realities of minimizing losses.
At best, the federal government is a clumsy executor. I don’t think we should expect its dexterity to significantly improve when it comes to asset management.
Eventually, they’re going to have to focus on maximizing the return on the portfolio’s assets- or at least, conduct damage control. Otherwise, they’re betraying the American taxpayer, the legislators that support this plan, as well as the foreign countries who are the real source of the funds for this bailout.
A side note for homeowners who think this plan might help them to avoid foreclosure: just because the federal government is involved, doesn’t guarantee that you’re going to avoid foreclosure. According to Peter G. Miller, over 9% of all HUD-insured FHA loans were in foreclosure. Even the federal government has limits on how much of a loss it’s willing to incur.
In a number of markets, the average loss severity is 50%. If it makes more sense to sell these mortgages to the U.S. Treasury than to foreclose, then Uncle Sam is going to have a number of loans that are still at very high loan-to-value levels, relative to the potential losses on homeowners who were unable to avoid foreclosure
Since there’s no reason to think that this plan will stop the decline of housing prices in any way, there is a risk that losses could still be significant if they have to take a number of these homes back.
Compounding the problem is the Federal Reserve study that shows that loan modifications only make sense in cases where the assistance offered is less than 10 percent of the anticipated loss in foreclosure.
The combination of decreasing the loss severity while at the same time paying “hold-to-maturity” prices for these assets means that it makes more sense, from a financial numbers standpoint, to foreclose on these new loans than to modify them and help these homeowners to avoid foreclosure.
If the tendency is to modify most of these loans in spite of all these issues, then the funds to acquire these loans will be mismanaged, and the those running this program will be derelict in their duty to minimize the losses to the taxpayer. They will have violated their fiduciary duty, and the losses will likely be much greater than expected.
So… how do you see that one playing out?
For many of those who are begrudgingly willing to give this plan a thumbs up, they expect accountability and financial responsibility, so as not to waste taxpayer funds on this bailout of the century.
Are we okay with the federal government openly and willfully mismanaging its funds?
Like most government-administered “solutions,” this plan will have a number of unintended consequences, and it will likely create more problems than it solves.
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