Rescue Includes Steps to Help Borrowers Keep Homes; Bill Would Give Government Power to Alter Mortgages

The bill not just gives the government power to alter mortgages, it essentially requires it.

The bill calls on the government, as the owner of mortgages, mortgage-backed securities and other assets backed by real estate, “to implement a plan that seeks to maximize assistance to homeowners and use its authority to encourage the servicers of underlying mortgages, and considering net present value to the taxpayer, to take advantage of…available programs to minimize foreclosures.”

You read about it first here at Arizona Real Estate Notebook.

The focus of the “rescue” bill is shifting towards creating a huge program to modify loans.

I have often wondered why banks don’t modify more loans.

“There’s a great deal of skepticism about the ability of modifications to improve the performance of loans,” said Rod Dubitsky, head of asset-backed securities research at Credit Suisse. “Investors think these loans will all redefault in a year or a couple of years and the losses will be higher.” Historically, modifications haven’t done that well, Mr. Dubitsky added, “but the key question is what will happen if you do mods that are a different flavor than before.”

One fear is that if mortgage companies or the government, is too liberal in offering help, more borrowers who might otherwise stay current on their loans will fall behind to get a better deal. “What we don’t want to do is undertake some kind of program that changes the behavior of those many, many people who undertake extraordinary effort to pay their mortgage and make sure they can stay in their home,” said Karen Weaver, global head of securitization research at Deutsche Bank.

Maybe the banks know something we don’t.

Loan modifications may help some home owners, however, the banks should be doing the modifications, not the government where loan modifications will tend to become political gifts to politically powerful constituencies.

We are almost through with our correction in Arizona. Now, with this bill the market won’t get back to normal until 5 years or more from now when this program ends.