About Government Refinance and Home Purchase Programs

Information and Updates on Government Mortgage Programs
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There was an article over at Forbes recently that will be of interest to anyone following the progress of the new Hope For Homeowners (H4H) program. The author says what others are saying — that in order to truly fix the problem our economy faces we will first need to put a tourniquet on the foreclosures all over the country. But he also says that the current H4H program will not work because it is a voluntary program for banks and there is not enough incentive for banks to participate right now.

Unfortunately, he appears to be right. We are more than two weeks into the launch of the H4H program and we have yet to hear of a single bank that is gung ho about the program and actively participating.

There are increasing rumors that some of the Big Bailout money could be used to sweeten the deal for banks in some way to get H4H working better. It may not be as simple as the government taking the full brunt of the losses of the upside down mortgages as John McCain suggested (lifting his idea from Hillary Clinton ironically). But it could be something like the the banks and government sharing those losses. If the federal government does announce a plan along these lines we could see a massive increase in the adoption of H4H, which has thus far not even shown a pulse.

See this excerpt from the article I mentioned:

A more modest proposal than that of Sen. McCain, which may balance costs and benefits more effectively, would follow the example of the successful Mexican “Punto Final” plan of 1999, which resulted in substantial debt write-downs very quickly and the resolution of much financial gridlock in that country.

The government would share losses borne by lenders from mortgage principal write-downs on a proportional basis. For example, taxpayers could absorb 20% of the write-down cost borne by lenders on any mortgage so long as it is agreed through a voluntary renegotiation between lenders and borrowers, and so long as doing so creates a sufficient write-down for borrowers to be able qualify for refinancing under the FHA facility.

This plan would cost much less than the McCain plan (perhaps only about $10 billion) and would not reward the worst kind of recklessness, since it would only result in borrowers receiving help if they were already close to avoiding foreclosure on their own. This proposal, while selective in its effect, could still help many avoid foreclosure.

The group of borrowers whom it would help are those whose mortgages need a little more of a write-down than their lenders would be willing to do without a subsidy. For this “marginal” group, foreclosure creates only a small private benefit to lenders compared with the alternative of agreeing to a viable mortgage write-down. The plan would work by encouraging lenders to write down more of any outstanding mortgage to avoid foreclosure. But it would not rescue people who are so far from being able to avoid foreclosure that even a substantial subsidy for write-downs isn’t enough.

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