Dear Mr. President, Chairman Bernanke, Secretary Geithner, Brian Moynihan, Vikram Pundit, Jamie Dimon and John Stumpf,
Want to start to fix the economy and help housing at the same time? Refinance underwater and insufficient equity borrowers. It’s really that simple. Since Fannie Mae and Freddie Mac are the holders of a majority of outstanding loans, let’s start there.
Step One: Mr. President, push Congress to change the underwriting guidelines for Freddie and Fannie to allow the Fannie/Freddie loan servicers to refinance any homeowner who is current on their mortgage. Qualifications using all industry standards for borrower underwriting including credit, asset and income verification remain; it’s just that they do not have sufficient equity to do so based on today’s current standards. So we change the equity requirement standards. This is the key component. Current underwriting guidelines used by the banking industry require a borrower to owe less than 80% of the value of the property. What this means is that every borrower who bought during the market bubble, or pulled equity out at that time, is saddled with a mortgage interest rate that far exceeds today’s historic lows. Because they are equity deficient, they are unable to take advantage today’s low rates without paying down the mortgage to raise their loan to value (LTV). In other words, they cannot refinance. Essentially the banks are holding these borrowers hostage to near usury rates because their equity position prevents them from refinancing.
Why is this significant? By excluding these homeowners from refinancing Mr. President, banks are forcing one of the following scenarios: the borrower, a) remains current but pays up to 30% more in interest than their counterparts buying today; b) is forced to attempt a loan modification while current on their payments (impossible); c) is forced into a “strategic default” so that they get the attention of the servicing bank to try for a loan mod; d) defaults and does a short sale (giving up their family home, ruining their credit and selling at below market value, which in turns puts more borrowers underwater; or e) let the home go back to the bank via foreclosure.
Now I’m no rocket scientist but none of those options sound very good to me.
You might be thinking that the TARP money allocated for HAMP would be the solution; certainly that was the hope at the time the legislation was passed. However, of the government allotted $50B to be used for modifying existing loans, little has been. In fact, of the $50B in available funds, only $2B has been used to date. That’s about 4%. This emphatically suggests that the policy is failed and that banks really don’t want to do loan modifications. As a real life example, I am currently handling a loan mod for a client that has them in their home, without having made a payment for 18 months. And while the mod has been “approved” for 3 months already, the bank has yet to draw documents as underwriting continues to try to figure out how to work the numbers to the satisfaction of the investor; no kidding, that’s a true story.
But what if this had been the story: the borrower applies for a refi, instead of a strategically defaulting; their credit therefore remains intact; they have the income, credit and assets to qualify (just not the equity); they reduce their payment by 30%; the bank keeps the servicing contract (profit for the bank), makes a loan or discount point on the deal (profit for the bank), has a performing asset vs. a nonperforming one (freeing up capital for the bank to lend – more profit for the bank). Plus there’s the added benefit that the bank is stronger, the homeowner keeps their home and the neighborhood doesn’t have another distressed property on the block putting further pressure on prices and continuing the downward spiral of prices.
Step 2: We know that Congress can enact these changes for Freddie/Fannie loans almost instantly – this means an immediate boon for the banks and homeowners. It also means that all those now-able-to-refinance homeowners, immediately have all that mortgage savings to inject into the economy – consumer confidence soars as spending increases, businesses thrive and hire which we all know leads to an improving economy, greater Federal revenue by having more tax payers paying into the system, which offsets and brings down our deficit and it doesn’t cost the tax payer anything except the lower interest rate they would now be collecting. This cost of course pales in comparison to the cost of defaulting mortgages (how much have Freddie and Fannie lost since 2007?), not to mention the social cost of uprooting families, the blight of vacant home etc. etc. etc.
Step 3: Address the loans that are not backed by Freddie and Fannie – ie: all the jumbo loans and the like – by altering the use and application of the TARP/HAMP money by creating an “Equity Insurance Fund” guaranteeing 20% equity based on the outstanding loan equating to 80% of essentially a hypothetical value. In this way, servicing banks (for the benefit of their many investors who really hold the loan notes) that refinance undercapitalized (low or no equity) loans, have their coveted 80% LTV by virtue of the new insurance fund, which would only kick in, in the event of foreclosure. Should the owner subsequently short sale, the 20% is not applied. By doing this, the government retains the $50B rather than use it, so the tax payer only pays on default, instead of compensation for loan modification. The investor is better protected and again, the banks profit from servicing, discount points on the new loans and all the other a fore listed benefits.
Mr. President, I can think of no faster, easier, more efficient way to infuse the economy with disposable income at little or no cost; keep more people in their homes; get the banks out of the foreclosure, asset liquidation and property management business. In effect, everyone wins.
Mr.’s Pundit, Dimon, Moynihan and Stumpf, please urge your Congressional contacts to push this agenda immediately. I know you don’t want to be in the loan modification business and certainly don’t want to be in the foreclosure and asset liquidation business. Just think of the staff you wouldn’t need, the new loans you’d be making and the profits! But you need to do it quickly before every loan you have is in default and your borrower’s credit ruined, because then they won’t qualify to refinance.
Thank you for reading and I am at your disposal.