BREAKINGVIEWS – New U.S. mortgage plan: progress but not panacea

March 26, 2010

— The author is a Reuters Breakingviews columnist. The opinions expressed are his own —

By Rolfe Winkler

NEW YORK, March 26 (Reuters Breakingviews) – Cutting struggling borrowers’ mortgage balances has been a bridge too far for most U.S. lenders. That’s one reason previous efforts to modify mortgages have had little impact. The plan announced on Friday by the Treasury to entice lenders to cut principal voluntarily could finally achieve more — and would appropriately force lenders to take losses.

Lenders, with government encouragement, have already tried modifying mortgage terms to make them more affordable. But this has mostly involved tweaks to interest rates and repayment terms, not cuts in principal. So it’s not surprising that nearly 60 percent of modified loans are back in default after 12 months, according to government data released on Thursday.

The Treasury’s proposal allocates $14 billion to incentivize banks to forgive principal on home loans. That could achieve better results because it addresses the problem of negative equity, which can deter borrowers from making mortgage payments even if they strictly could afford to. The program also strikes the right kind of balance by ensuring banks would still bear most of the costs and stretched borrowers would get only limited relief.

The plan calls for loans to be refinanced with government-guaranteed mortgages through the Federal Housing Administration. And including both main and second mortgages, a borrower’s loans would still be allowed to add up to as much as 115 percent of the value of his home. That means taxpayers would be on the hook to a point. Yet this is the kind of trade-off needed to make a significant dent in America’s mortgage problem. Some 7 million Americans have stopped making mortgage payments, and that could rise to 12 million, according to Amherst Securities Group.

Though voluntary, the Treasury’s plan should appeal to lenders since their losses when they foreclose are typically higher than the write-downs envisaged forgiving mortgage principal — and they would get a portion back as an incentive. But coordinating multiple parties, including different lenders on the same properties, has proven a challenge in other modification programs.

Nonetheless, it’s worth a try. If the all-carrots approach fails, however, regulators could eventually turn to sticks. With home values lower than many mortgages, part of each loan isn’t really secured any more. Amherst reckons bank watchdogs could require their charges hold more capital against that quasi-unsecured debt — effectively forcing them to take some of the losses anyway.


— The U.S. Treasury on March 26 announced a $14 billion effort to try to stem a rising tide of home foreclosures by giving lenders incentives to erase some mortgage debt and slash mortgage payments for the unemployed.

— The new aid programs, funded from the $50 billion allocated to housing rescue under the Treasury Department’s Troubled Asset Relief Program, will also allow borrowers to erase mortgage debt down to a maximum of 97.75 percent of their home’s value for first mortgages and 115 percent for the aggregate of first and second-lien loans.

— The program would involve the written-down mortgages being refinanced through the Federal Housing Administration.

— Treasury release:

(Editing by Richard Beales and Martin Langfield)


Friday, 26 March 2010 15:02:35RTRS [nN26158311] {C}ENDS

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