Is President Bush poorly advised?
Delinquent U.S. homeowners, facing foreclosure, are unable to make
their monthly mortgage payment due to insufficient monthly income.
I want to make it clear at the outset, you have to go back to the 1930's to find a worst mortgage market than that period from 1978 to 1985. The lack of enforcement - of tried and true mortgage underwriting standards - is the reason for the 2002 to present contemporary foreclosure issues facing the mortgage banking industry. Transfer the risk and service the problem.
Stated Income/Stated Assets (SISA), No Income/No Asset (NINA) and a variety of other types of mortgage programs made it easy for underwriters to approve loans. These approved loans were closed and bundled into securities and the risk was transferred to investors.
The current foreclosure issues faced by many U.S. homeowners is a cause and effect of greed and shoddy underwriting. If there were no investors to purchase the risk, the foreclosure issues of today would be nonexistence. The mortgage banking industry does not close loans it can't sale.
The baby was thrown out with the bath water.
Contemporary times are in the mind of the beholder, but reality is steadfastly in the hands of the decision maker. The current 2007 foreclosure issues were crystal clear to me back in 2002. It did not take a genius to figure out the impact of a future fully indexed rate of 8.00 to 13.00% for borrowers using "Adjustable Rate Mortgage" loan programs with low rates beginning at 1.00%.
Where were the wise men?
President Bush's initiatives using FHA programs, "Short Refinance Loan Payoffs", instructing the Treasury and HUD to put pressure on current loan beneficiaries to "develop more favorable loan products" and offer note modifications - lower interest rates to delinquent homeowners - will not help those borrowers with insufficient incomes to make the monthly mortgage payment.
I'm in favor of "note modification" (lower interest rate) by the delinquent mortgagor's beneficiary (investor), but oppose to any government intervention to save the homeowner from foreclosure.
I'm in favor of increasing FNMA/FHLMC's loan limits from $417K to $550,000.
Government intervention, in any commercial enterprise, will always cost the U. S. tax payer money. The investor is responsible for investment decisions and not U.S. tax payers.
Bad decisions are the investor's responsibility.
The key to saving homeowners from foreclosure is not forgiving debt or modifying the existing mortgage by lowering the interest rate, but reviewing the borrower's net monthly income and determining their maximum affordable monthly housing expense. Granted, this is underwriting after the fact, but the reality of the investor's situation is the potential loss of the investment.
If the mortgagor has the income and ability to repay the mortgage, the question becomes what are the terms necessary to cure the default and establish an affordable monthly loan payment that will repay the debt? If the homeowner has loss all means of support, the interest rate won't matter, because the borrower can't make the monthly payment.
I realize that the income from a mortgage note securing a specific security is paid to the security's investor(s). The Mortgage Backed Security (MBS) is secured by one or more mortgage loans and the monthly interest income and any principle reduction received by the mortgage servicer - many times the MBS issuer - must be passed through to the investor(s). MBS investors may pool many MBS investments into a "Collateralized Obligation Bond" (COB) and offer these bonds to investors. A mortgage default can impact many investors along the fragmentation route.
Many beneficiaries are involve in today's real estate lending business. It is therefore necessary to work with all investors to develop a satisfactory solution for the delinquent borrower. Underwriting an existing loan is more complex than underwriting a new loan request. The reasons for a loan default are many, but the primary reason rest with family income: insufficient monthly income to handle monthly outlays. Any credit review will normally find multiple delinquent issues.
Financial counselors provided the delinquent borrower, by the loan servicer, is the first step in solving the default issue. Once the loan servicer understands the borrower's financial issues, a solution can be addressed. A decision to foreclose or not to foreclose is the goal of the review.
The decision to extend new mortgage terms to the delinquent borrower will depend on the borrower's ability to handle the proposed lower monthly mortgage payment and existing non-housing debt. A review of the borrower's monthly income and the probability of continued employment is an absolute requirement prior to offering the borrower a financing solution.
If investors are unwilling to accept a lower yield to protect their investment, then foreclose and be done with the problem. If the equity in the property is insufficient to repay the debt, so be it.
All losses can be attributed to greed.
The only practical way to eliminate the risk of a delinquent loan and subsequent foreclosure and save the multiple beneficiaries from loss, is to refinance the debt. Extending the loan term and adding all delinquent interest and fees to the existing loan balance will not help a borrower who does not have the income to make the new payment. This is not rocket science.
The delinquent loan's servicer must advise the investors of the necessary steps required to cure the delinquent loan and provide a financing solution. All parties involved must accept some responsibility in funding the solution. None of the parties will be happy, but if the solution is fair, equitable and protects the investment, then all parties should sign on to the financing solution.
Save the investment is the cry of the land.
The Federal Open Market Committee is responsible for the slow upward movement of "Fed Funds" and the corresponding slow upward movement of all ARM indices. The mortgage banking industry, including FNMA/FHLMC, binged on the spreads between short term and long term rates. That spread didn't narrow, as the fed increased the fund rate, until the ARM's "Fully Indexed Rate" became untenable to ARM borrowers with fixed rate loans that became variable after the fixed rate period. Many ARM borrowers monthly ARM payment jumped by 100%.
One step necessary to help ARM delinquent borrowers is to reduce their interest rate. Look to a fixed rate solution that is within the delinquent borrower's income capability. To accomplish this goal, the Fed must reduce the funds rate to 4.25% immediately. Lower rates will not help those suffering financial hardship, but will help those with the capability to repay the debt.
Lower short term rates, at this time, will not create an inflationary environment, but will help the economy over some tough financial issues.
President Bush would be well advised to allow financial market forces to work through the issues created by the 2 million homeowners facing foreclosure rather than meddling with tried and true underwriting solutions. Insufficient income will require foreclosure.
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