The big news this week is the newest program aimed at helping borrowers underwater on their home mortgages from defaulting. This program was originally announced in March of this year using funds originally set aside in the Emergency Economic Stabilization Act of 2008 (commonly known as TARP). As foreclosure actions continue and mortgage delinquencies do not seem to be slowing, the recovery of the industry as a whole is potential jeopardy. Obviously, addressing the issue is very important and most actions thus far have not helped the vast majority of borrowers. There is little indication that this program will be any different. In my opinion, it will help very few borrowers. That said, this program and others like are at least attempting to address the problem.
The eligibility conditions for the program are as follows:
- Home must be in a negative equity position.
- Homeowner must be current on the loan.
- Must be a primary residence.
- Current loan cannot be an FHA-insured loan.
- Current first holder must be willing to write off at least 10% of unpaid principal
- New loan will be 97.5% or less of current property value
- Current subordinate loans (i.e. 2nd mortgages) must re subordinated and the total loan to value must be less than 115%
- New loan must meet debt ratio requirements
On its’ face the program sounds great for borrowers who are at risk on their home due to owing significantly more than its’ current value. There are three major problems. First, current lenders ARE NOT required to participate. That includes both current first and second mortgage holders. The second problem- although the FHA will insure the new loans, current lenders and investors are not guaranteed to originate these loans. Finally, pricing on the new loans, while influenced by the FHA insurance is also not guaranteed. That means that any potential borrowers in the program face a number of hurdles. Lenders may be hesitant to originate new loans on one side while facing significant losses on their current loans. In short, I believe that this program will not be able to offer much for troubled borrowers.
In other news, the Federal Reserve issued their latest monetary policy statement. As expected, their announcement indicated that the Fed would hold rates steady for the foreseeable future. The statement also pledged help to keep the credit markets moving by buying additional mortgage backed securities. The Fed had previously started slowing the rate at which it purchased the securities. The announcement stated that they would buy around $1 trillion in securities by October of this year.
The market was relatively flat last week and there were few fluctuations. Rates remained steady as the news in the Fed statement was expected by analysts.
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