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New Treasury Mortgage Borrower Salvage Program: More Smoke and Mirrors?

We didn’t think much of the New Hope Alliance, the program brokered by the Treasury Department to rescue subprime borrowers facing resets. The program’s criteria targeted those who were already paying fairly high initial interest rates with very little to no equity in their house at the time of closing. In other words, this group already was likely to be in negative equity territory due to the decline in the housing market; in many cases, it would make more sense for them to renege on the mortgage. So who really benefits from that program?

The New Hope program was also widely faulted for being largely cosmetic, since it would help relatively few homeowners (although the tally of who has supposedly been helped is sufficiently creative so as to make the program appear as if it is indeed accomplishing something). The new program to be announced at the Treasury tomorrow, Project Lifeline, looks like even more of the same.

The Associated Press provides a nice summary:

The plan will allow seriously overdue homeowners to suspend foreclosures for 30 days while lenders try to work out more affordable loans are worked out.

On a pilot basis, the plan will involve six of the largest mortgage lenders, in hopes that more lenders will sign on. The participants are Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., JPMorgan Chase & Co., Washington Mutual Inc. and Wells Fargo & Co.

This verges on silly; the banks can do this on their own without the fanfare of a name and an the grandstanding of the Treasury.

And fittingly, the media isn’t taking it all that seriously. The Wall Street Journal (at least as of this hour) does not have the story in its first page news summary and the article itself featured only negative comments:

Martin Eakes, chief executive of the Center for Responsible Lending, a nonprofit research group based in Washington that frequently bashes the mortgage industry, said moves announced so far have been “baby steps.” He said lenders should move more aggressively to reduce loan balances to current home values and make monthly payments affordable. He acknowledged, however, that servicers of loans — the firms that collect payments and handle foreclosures — face the risk of lawsuits from investors that own loans if those investors believe borrowers have been given overly generous terms.

Bruce Marks, chief executive of Neighborhood Assistance Corp. of America, a Boston-based nonprofit that works with distressed homeowners, dismissed Project Lifeline as a “PR stunt.” He said it already should have been automatic for loan servicers to pause foreclosure proceedings for homeowners seeking to qualify for a more affordable loan.

While the New York Times has a page one story on the underlying problem, “Mortgage Crisis Spreads Past Subprime Loans,” it does not mention the new plan until the second page. Even then, it intimates that its real aim is to reduce the number of borrowers who decide to walk from their homes. In other words, the initiative may be more for the benefit of the industry than the consumer:

Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms.

In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.”

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

The Lifeline program is so cosmetic that it is difficult to think that it’s intended to address the change in attitudes among overextended borrowers. But the fact that the Times presents that as a motivating factor is telling.

Update 3:00 AM: Bloomberg’s story has some choice quotes:

Paulson, who as recently as last month opposed a moratorium on foreclosures, is pushing lenders to go beyond earlier pledges to freeze subprime interest rates for five years…

“There is this huge disconnect between what is being represented by the industry and what is being experienced on the ground,” said Kevin Stein, associate director of the California Reinvestment Coalition, a San Francisco-based housing activist group. “Borrowers are falling through the cracks while more and more of these press releases come out. It’s clearly not enough.”…

“This is good, but we’ve seen this over and over again,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending in Washington. “The fact that they keep having to roll out subsequent rescue plans every few weeks underscores that each plan is inadequate.”

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One comment

  1. MikeInOregon

    Regarding the government Treasury’s plan for “private” banks to renegotiate loans with their customers leaves me speechless.

    Thanks for speeking, Yves,

    “This verges on silly; the banks can do this on their own without the fanfare of a name and an the grandstanding of the Treasury.”

    Why is it that bankers are like deer in headlights; can’t see that their portfolios are in danger and they had best do something?

    A separate problem is securitised mortgages. In the securitised case, an unintended consequence of securtization is the loss of the ability for the holder to renegotiate the original loan. And since the securitized debt has been cut into tranches, deconstructing the tranches & securitization into notes and Deeds of Trust is virtually impossible.

    Again, in regards to unsecuritized mortgages it makes sense for the lender to renegotiate the loan. But for the Treasury getting involved, I quote Yves,

    “This verges on silly; the banks can do this on their own without the fanfare of a name and an the grandstanding of the Treasury.”

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