Monday, November 3, 2008

Update on Operation Hope For Homeonwners and Other Mortgage Modification News

JP Morgan announced a sweeping plan to modify nearly $70 billion in troubled mortgages on Saturday.  According to the Wall Street Journal article, the plan will cover as many as 400,000 borrowers that will benefit from lower interest rates, smaller principal amounts or other more-affordable terms.  The plan is aimed at modifying the terms of option arms, a boatload of which JP Morgan acquired in its takeover of Washington Mutual.  In a shrewd PR move, JP Morgan unveiled the plan days after it received $25 billion from the US Treasury.  
Banks are facing increasing political pressure to use the bailout money to help beleaguered homeowners trapped in upside-down mortgages they either can't afford, or won't be able to afford once their mortgages recast.  The FDIC's Sheila Bair is pushing for widespread mortgage modifications to stop the continuing spiral of increasing foreclosures, plunging home values, leading to more foreclosures.  The government is planning an even larger effort, affecting up to 3 million borrowers, and estimated to cost between $40 billion and $50 billion.  The question remains: Will these modifications prevent foreclosures?  Or were the majority of option arm borrowers only interested in making a quick buck in a hot real estate market and not as keen on homeownership in a flat to declining market where they can rent for less than even their modified mortgage payment?  Perhaps the answers lie somewhere in between.  
A few clues indicating the potential effectiveness of these mass mortgage modifications can be found in the initial results of the programs initiated by Ms. Bair with Indymac borrowers following the FDIC's seizure of the California bank, and Operation Hope For Homeowners.  Operation Hope For Homeowners was passed through congress in July and went into effect on October 1st.  Housing Wire has an update on the progression of this plan, aimed at aiding 400,000 homeowners to refinance into kinder FHA-backed mortgages.  According to Housing Wire, 42 mortgage applications were filed during the first two weeks of the period.  When the plan was originally announced, I suspected that borrowers would not be interested in participating as they had no interest in sharing future equity appreciation with the US government.  According to the story, however, it is the investors that are unwilling to allow modifications, as it requires that they write down the principal to 90% of current LTV (not original LTV) plus pay an upfront premium.  Apparently, investors believe they can achieve higher returns by allowing the homes to go into foreclosure.
And then there's Indymac.  How are Ms. Bair's efforts progressing at Indymac?  The Wall Street Journal had a fantastic story on Saturday about the FDIC's efforts to aid troubled IndyMac borrowers.  IndyMac services 653,000 mortgage loans, about 65,100 of which are seriously delinquent, or at least 60 days late.  Of these, 47,000 might meet its requirement for a new loan.  The FDIC has already completed loan modifications for 3,500 borrowers.  Several thousand more have accepted the FDIC's offer, and are awaiting processing.  However, the FDIC has had difficulty in getting responses from some borrowers.  According to the article, the FDIC mailed out 7,500 letters to delinquent borrowers for whom the FDIC had recent financial information and received responses from three quarters of them.  In the past three weeks, the FDIC mailed offers to another 7,500 borrowers for whom it also has financial information.  Unfortunately, the FDIC has sent letters to another 19,000 borrowers for whom it had no recent financial information.  So far, only 10% have responded.  Uh oh.  If anything, the FDIC's experiment will reveal how many of these delinquent borrowers just flat-out lied on their mortgage applications about their incomes and are willing to walk away.  The statistics are not looking too good.  The Wall Street Journal's story is worth a read for anyone hoping to understand the root of the current mortgage crisis.  It is filled with anecdotal stories, that would be hilarious if they weren't so sad, about house cleaners and tree trimmers who make $35,000 a year that are having problems making the payments on their $700,000 mortgage, while their house is currently assessed at half the value.  Although they claim to want a mortgage modification, their best financial option is just to walk away and rent.  It seems unlikely that any government bailout plan can prevent the inevitability of people taking their best financial option.  After all, it was inevitable that people who were offered ridiculous terms on mortgages that they didn't understand would take those terms to buy a house they otherwise couldn't afford.            

1 comment:

K said...

Thank you for this update. The mortgage industry is obviously a little crazy and it's good to know what's going on.