Kudos to the folks over at the New York Times for tackling the perplexing issue of how the new housing legislation will really play out when it passes. The idea of helping people who are upside down on their mortgages refinance into FHA backed loans is nice but there are lots of questions to be answered. Here is an excerpt from the recent NYT article:
The effectiveness of the bill will depend to some extent on how it is handled by the F.H.A., an agency created during the Great Depression to insure home loans. It will have several challenges: persuading the lenders who made second mortgages and home equity loans to cooperate; screening loans to make sure borrowers have a good shot at keeping their homes after refinancing; and weeding out those trying to take advantage of the system.
Second mortgages and home equity loans were popular during the housing boom and often allowed Americans to buy a home with little or no money down or let them take out cash against their homes as prices rose. Now, home values have fallen so much that there is little or nothing left to pay off these loans when homes are sold or repossessed. The Congressional Budget Office estimates that about 40 percent of riskier mortgages made in recent years are coupled with such secondary loans.
Under the Congressional plan, these loans would have to be eliminated before homes could be refinanced. People who negotiate loan modifications say holders of second loans have been reluctant to take losses, and lenders with first loans are often unwilling to give them enough money to secure their cooperation. Under the Senate version of the plan, the F.H.A. would have some leeway in negotiating with borrowers who have second loans.
Another challenge for the F.H.A. would be selecting borrowers who have the best chance of paying off new loans. The agency would have to make sure lenders are not unloading only their worst loans, and lenders and the F.H.A. would have to guard against borrowers who can pay their current loans but would like a cheaper, government-backed loan.
How will they guard against people trying to fake it and get a cheaper loan? I have no idea. I worry that no one knows. It seems likely to me that banks will end up playing “chicken” with borrowers they think are bluffing. It also seems like this new legislation will encourage people to play that kind of game. We’ll see.
The article later said:
“In this rush to legislate and with the lack of discussion of a lot of issues, people will look at this bill in the winter and say we shouldn’t have done this, we shouldn’t have done that,” said Mr. Ely, who closely followed the savings and loan debacle. “The politics are going to be so different come next year. There will be another administration, and who knows what the makeup of the House and Senate will be.”
…
An official for the Mortgage Bankers Association, a trade group in Washington, acknowledged that the proposal may not help the majority of troubled borrowers, but said it would be a good start and would help restore confidence in the financial markets and the economy.
“There is no silver bullet,” said the official, Steve O’Connor, a senior vice president of the association. “There is no single solution to the housing crisis. It will take multiple tools to turn the housing market around, and it’s going to take time.”
