The reason this program is so important though is because we know something is in the works over at Treasury to do something like it. We may even get news of that later this week, according to some of my sources.
Wednesday, March 24, 2010
Principal write downs??
Can this week get any worse. First health care, then California throws away 200 million and now news of principal write down plans...... I thought it was just a few homes with old Countrywide loans but now CR indicates more are in the works. I never thought I would see this.
BofA announced a principal reduction plan for certain Countrywide borrowers.
CNBC's Diana Olick reports that Treasury might announce a principal reduction program in the next few days: Bank Of America's Mortgage Write Down—Just the Start? The Special Inspector General for TARP criticized HAMP today. The report was critical of the changing goals (no way 3 to 4 million will avoid foreclosure), the performance metrics, the marketing of the program, the low conversion rate to permanent status, and the high risk of re-default. The report notes that Treasury expects between 50% and 66% of temporary modifications will become permanent, and 40% of borrowers in the program will re-default (either while temporary or permanent). Those are horrible numbers.
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LA Times said "Borrowers with second mortgages or home equity lines of credit will not qualify in certain cases." OOf! Any idea how that works?
Taking a walk in the bank's shoes, I'm not sure this is a bad move. Let's say you are owed $800K, secured by a house in Temecula that is worth, based on recent neighborhood comps, $400K. The borrower, for whatever reason, defaults and says I just can't/won't keep making these $6K monthly payments.
The bank has three choices: foreclose, cut a sustainable deal, or kick the can down the road.
If you foreclose, you get your collateral and sell it, less re-selling and reconditioning costs, which can be substantial (clean-up costs, re-landscaping costs, repair costs, legal costs, security costs, etc.). Maybe you net $300K on the theoretical $400K home.
Or you can kick the can down the road. Talk the sap homeowner into paying, say, $3K per month using interest only on a below market interest rate to calculate payments. Hey nominal Mr. Homeowner, we reduced your payments to the same as a $400K mortgage, but you still owe us $800K. Seriously, if you were that homeowner, how much would you spend keeping up your home and landscaping? I think at that point most people would treat their home as a rental. Somewhere down the road, they'd probably treat their mortgage payment as rent too. Thus the 50% default rate on such modifications.
Lastly, you can compromise with the homeowner and cut their mortgage to the value of their home. Now the homeowner has a financial incentive to keep up their home (your collateral), and eventually pay the bank their full collateral value.
For responsible homeowners, it sucks that we are subsidizing deadbeats and fraudsters. But whether we are aware of it or not, we already are. There are tax payers and tax takers. Our guvmint' just granted another transfer of wealth this week.
As long as you don't have to recognize the losses, it's all good!
And why would the banks want to help out responsible homeowners? They're still paying (for now)!
Remember though, in many cases banks or owners of the notes have insurance on these loans. If they foreclose they get paid by (in most cases by AIG) for the losses. If they do a principal reduction they actually take a loss. Hmmm the plot thickens.
I'd be curious how that principal "forebearance" is treated from an accounting perspective.
Also, I wonder about the insurance issue. Aren't these former Countrywide loans that were the subject of lawsuits. If Countrywide had insurance on these notes why did they go bellyup?
Keep up the great work Golfer_X. I lurk a lot and appreciate all your posts.
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