This program to assist overextended homeowners has only just begun, so it is way to early to say whether it will succeed, but it is an improved version of Dean Baker’s “own to rent” idea.
Note that one of the elements, having a new bank buy the original lender out at the 70% of mortgage value for a failed or about to fail loan should be uncontroversial. My understanding is that in a normal market, a foreclosure typically leads to a 30% reduction in the value of the bank’s asset (although one would assume smaller mortgages take a proportionately bigger hit). Since in most locales, this is far from a normal market, 70% ought to look like a very good deal. However, the program sponsors have found limited receptivity, in part because most mortgages are in securitized vehicles, and servicers make more on a foreclosure than on the sale of a loan.
Nevertheless, it is too bad only one small program like this is in process. The New Jersey effort could founder for reasons that have nothing to do with the merits of the concept. Since the amount ventured is so small ($6 million), it’s too bad that there aren’t 20 programs like this up and running to see if, either in its original form or with some tweaking, it has the potential to be useful on a large scale.
From the New York Times:
A second initiative, in New Jersey, is spearheaded by the Federal Home Loan Bank of New York, which lends money to roughly 300 local banks in New York, New Jersey, Puerto Rico and the United States Virgin Islands to finance mortgages.
Under this new initiative, called the Housing Assistance and Recovery Program, or HARP, the Home Loan Bank lent $6 million to Magyar Bank, based in New Brunswick, N.J.
The First Baptist Church of Lincoln Gardens, in Somerset, N.J., which provides counseling services through its First Baptist Community Development Corporation, identifies homeowners who are in danger of foreclosure, then negotiates with the lender to buy out the loan.
Using proceeds from the Federal Home Loan Bank, Magyar Bank puts up 70 percent of the remaining balance. HARP representatives expect that lenders who hold the distressed mortgages will write off much of the remaining 30 percent, rather than incur a foreclosure.
After the loan has been transferred, the homeowners become renters of their home, making payments to First Baptist, which holds the new mortgage from Magyar Bank. The rent level depends in part on what the family can afford.
First Baptist then offers financial counseling to tenants, with hopes of helping them rebuild their credit scores so they may eventually qualify for a new mortgage on the same home.
According to Alfred A. DelliBovi, chief executive of the Federal Home Loan Bank of New York, one family has completed the transition from homeowner to tenant, and four more families are soon to follow.
One obstacle for HARP in some cases, Mr. DelliBovi said, is finding the current lender. Loans are typically sold to investors, sometimes repeatedly.
Meanwhile, servicers, whom investors pay to collect mortgage payments from borrowers, often have no incentive to help borrowers find the ultimate holder of a loan, Mr. DelliBovi said. “Servicers make more money on a foreclosure than when the loan is worked out,” he said.
Despite the slow going, Mr. DelliBovi said his company is already negotiating with other banks and community organizations in New York and New Jersey to set up similar programs.