The purpose of the policy, says the Fed, is to “avoid preventable foreclosures” in those cases where the Fed can “maximize the net present value of the assets for the benefit of taxpayers.”
The idea is try to save those who can be saved — and that's not everyone. However, given that the government is now a major investor in more than 200 banks, including the biggest banks in the country, the Fed effort could potentially be the largest foreclosure rescue effort to date, and one with real impact.
The Fed policy outlines a series of steps to determine which loans can be saved and those which will be foreclosed.
Proactive Review: The Fed says “if residential mortgage assets become subject to this Policy” then the Fed or its agent (meaning the lender, servicer or originator) will take a look to see if “borrowers should be offered a loan modification.”
This is hugely important because the need is to reduce the stock of foreclosed properties, inventory which holds down local home prices. Whether a home is owned by a resident or an investor makes no difference if it sits empty on your street.
This is a far-higher housing cost than the 31-percent standard the FDIC is using to modify loans that it controls from the takeover of IndyMac. The Fed standard is also far tougher than the 34-percent benchmark that Countrywide is using to modify some 400,000 mortgages — a standard worked out with a number of state attorney generals. If the Fed's goal is to modify loans to “avoid preventable foreclosures,” then the natural extension of that objective should also be to avoid re-defaults, something more likely with a lower standard for housing costs.
Second Loans: Many recent borrowers purchased homes with piggy-back financing — an 80 percent first loan and a second loan for much or all of the balance. The idea was to buy with little or nothing down and avoid the cost of private mortgage insurance. An interesting strategy — if home values go up.
One area where the Fed has broken new ground is that it will consider modifications of rental properties with one to four units. This is a substantial departure from past federal modification plans and recognizes the reality that a large number of properties facing foreclosure are rentals.
The government has tried a number of efforts to rescue failing borrowers and to date there have been no successes. The hugely promoted FHASecure program resulted in 4,037 delinquent conventional borrowers who were able to refinance with FHA loans. The Hope for Homeowners program has attracted 412 applications between October 1, 2008 and January 15, 2009 — with not one loan approval.
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.
Blog Author Bio: Rob Alley earned a bachelors degree at Virginia Tech, in Blacksburg, VA in Biology. Rob Alley consults with homeowners regarding Real Estate transactions and speciliazes in listing and selling Charlottesville Real Estate. Realtor/Owner of Virginia Real Estate Solutions at RE/MAX Assured Properties
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