Wilbur Ross, in a New York Post Op-Ed piece, complains that the Obama Homeowner Affordability and Stability Plan doesn’t work because it excludes everyone whose mortgage is held by someone other than Fannie Mae and Freddie Mac. His major argument is that subprime mortgage holders and other borrowers who have privately securitized mortgages can’t take advantage of the program. This leaves an incredible amount of borrowers, particularly the subprime borrowers- who by definition are the biggest risk of defaulting- at risk of default without any recourse.
From his New York Post piece:
For starters, it doesn’t cover a large class of ailing mortgages – ones that aren’t federally backed, nor serviced by a federally regulated entity. So, many subprime borrowers – the most disadvantaged class – won’t be eligible, leaving whole neighborhoods still deteriorating in value.
Similarly, much of the privately securitized mortgage debt will be unaffected. One result is that government-sponsored lenders – Fannie Mae, Freddie Mac, Ginnie Mae, etc., agencies already responsible for a majority of all mortgages outstanding and more than 80 percent of new mortgages – will grow even more dominant in the mortgage market.
Ross finds other problems with the program including its complexity and the level and use of incentives to encourage servicers and note holders to participate.
But Ross’s plan is no better. His recommendation is:
More effective and less complex would have been for government and the lender to share 50-50 in reducing the principal amount to 100 percent of the home’s value. This would automatically lower monthly payments – and give the homeowner a natural incentive to keep building equity in his largest asset. All the program’s small, gimmicky incentives would be unnecessary.
Ross ignores the deflationary element of the housing market. While principal reductions would help consumer spending, it won’t do anything to keep people in their homes. By cutting the principal value of a home to 100% present day value you (again, by definition) have kept a homeowner underwater in a declining market. At 100% financing you still have zero flexibility to sell if you had to, and you have zero skin in the game. And today’s 100% is tomorrow’s 110%. This plan doesn’t work.
His final argument, that the banks are the big losers in this plan is absurd. Ross again:
One wonders whether the real point is to disguise the fact that lenders are the big losers under this plan. The simple approach of writing down the mortgage to the home’s market value would make those losses obvious; merely reducing the payments breaks the loss up over years of income statements.
Lenders have already lost. They made bad bets, they need to take the losses. To state that they are the losers under this plan belies the fact that their fate has already been sealed by the bad business decisions they’ve made over the last seven years. Lenders will lose less with a performing modified loan then going through foreclosure in this economy, period.
While the Obama plan will not work, neither will Ross’s. The mortgage mess is a complex one, it needs a complex solution that addresses the primary problem of excess debt and leverage while dealing with the bad assets.
Last 3 posts by Morgan
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