FDIC Loan Modification Program- Behind the Numbers
I’ve looked at the overview of the latest Fannie Mae and Freddie Mac loan modification/foreclosure bailout/trial balloon of the month. Let’s take a look at a few details to see what we have….
First of all, the underlying purpose of the program is to prevent foreclosure in order to keep investors from losing money, NOT to keep homeowners in their homes. It just so happens that investors’ and homeowners’ interests are aligned, somewhat. The minute the mortgage company determines that a foreclosure makes more financial sense than helping you to stay in your home, you can be sure that you’ll be out soon enough.
The reason for this program is because the servicers cannot keep up with the volume of people trying to prevent foreclosure. So the GSE’s are trying to create a program that will QUICKLY get delinquent loans performing again.
They’re talking about reducing payments to “as low as 31%.” Now let’s take a moment for a reality check. When a store is having a sale with discounts “as much as 31% off,” exactly how much of that inventory do you expect to be offered at the maximum discount? Even if there’s only one item offered at that rate, they get to make the claim.
The government has a swell history of using the absolute best-case, maximum possible projections when selling their programs. The last “foreclosure bailout” legislation from July promised to “keep 300,000 homeowners in their homes.” That program was supposed to begin, by law, on October 1st. The last report I saw just recently said that 42 applications had been filed. Forty-two! Assuming every one of those borrowers gets approved, it will take 59 1/2 years to help 300,000 homeowners prevent foreclosure at that pace.
So when they say, “as low as 31%,” let’s be clear that this will likely be a small percentage of all borrowers.
Next, people have been calling a LOT lately, thinking that the government is going to help write off part of the principal on the mortgage, thus reducing the amount that they owe.
Not so. They state that “Modifications are based on interest rate reductions, extension of term, and principal forbearance.” Principal forbearance is NOT principal forgiveness. So if you’re underwater on your home before you sign up for this program, you’ll be underwater afterwards.
Fannie Mae and Freddie Mac will pay servicers $1,000 to do these loan modifications. That should provide some incentive, and possibly cause some abuse.
They’ll also share in 50% of the losses if the borrower re-defaults.
As I’ve mentioned previously, the re-default rate is VERY high. Moody’s foreclosure prevention report and Credit Suisse’s foreclosure prevention follow-up both show re-default rates of 40-66%. So, are taxpayers okay with shouldering half of the losses?
Oh that’s right, the taxpayers’ opinions don’t really matter. We need look no further than the $700 Billion bailout from a month ago. Never mind.
They’re estimating that they could modify 50% of the 4.4 million “problem loans,” meaning that they’re going to try to sell this program using the maximum possible figure. Forget the fact that only 33% of the homeowners responded to Sheila Bair’s IndyMac loan modification program. [She's the FDIC Chair who's designed this program.] And pay no attention to the fact that only half of the applicants will qualify. Let’s also ignore the fact that she’s only been running this program at IndyMac for NINETY DAYS, with no long-term indication that it yields better results than case-by-case modification.
So remember this, and when they say “We’ll help 2.2 million borrowers to prevent foreclosure,” the real number is closer to 726,000. This is not an insignificant number, but let’s try to be accurate here.
National averages can be a bit misleading but the number I most frequently see for the average loss on a foreclosure is $40,000. Let’s do a little math:
$40,000 x 726,000 homeowners x 50% default rate = $14,520,000,000 in losses on this program.
The government will not participate in any loss where the homeowner makes less than 6 payments on the loan modification. It’s unclear to what degree this would limit the losses. The Moody’s report seems to indicate that many sub-prime loans fall back off track within 6 months.
As stated above, they’ll still foreclose on you if it makes better financial sense to do so. They’re applying the NPV test, so if the net present value of a loan modification is less than kicking you out, you’ll need to look for another method to prevent foreclosure.
As the loan-to-value ratio exceeds 100%, the government will participate to a lower degree in the losses.
When deciding how much of the loss qualifies for “sharing,” they go on to say, “the calculation would be based on the difference between the net present value of the modified loan and the amount of recoveries obtained in a disposition by refinancing, short sale or REO sale, net of disposal costs as estimated according to industry standards.
Did they say refinancing? Why, that’s funny! A refinance… for a homeowner in foreclosure… that’s funny!
That’s a joke, right?
Ahem.
Here’s their conclusion:
“Assuming a redefault rate of 33 percent, this plan could reduce the number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion.”
So, if you were looking for a long-term solution to prevent foreclosure, you’ve got a 1 in 3 chance of losing your home anyway, according to their fluffed-up projections.
How did they come up with a 33% default rate? I guess this is the “Hope” portion of the “Hope and Change” formula.
Even with their specious projections (they’re projecting a 51% better default rate than average) they’re still planning to lose 68% more than I’ve estimated here.
What do you suppose is the reason that they think their plan will do better?
“Because we’re from the government and we know what we’re doing here,” just doesn’t seem plausible.
Like it or not, loans modifications are best administered on a case-by-case basis. The fact is, the mortgage industry has come a heck of a long way in addressing the foreclosure crisis.
Just because people are impatient does not mean it makes sense to begin a one-size-fits-none program. This begs the question, are we just pretending to help homeowners with another charade or do we really want to help prevent foreclosure?
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