Every step the Obama administration has taken to assist underwater homeowners, from Hamp to the Federal Housing Administration's "short refinance program," has failed to relieve distressed borrowers because the programs are voluntary and require consent from all lienholders.
Significant modifications will not happen unless coercive pressure is put on the banks that have not repaid the Troubled Asset Relief Program and are behind on dividend payments for the preferred stock held by the Treasury.
The question is, how can we keep homeowners in their homes, reduce the number of foreclosures and lessen the oversupply of foreclosed houses on the market, which would decrease the housing supply and assist in a price recovery in the marketplace?
It is estimated that 23% of all mortgage-holders currently owe more than their houses are worth, according to CoreLogic.
Most interest rates prior to 2009 were in the 6%+ for first mortgages and 7% to 10% for second mortgages.
By reducing the rate to 4.5% banks would not be required, eventually, to write down the value of the asset as borrowers would be more able to continue making payments.
Assuming a 30-year mortgage of $300,000, a homeowner would save $376 per month, or $4,512 a year. Depending on the number of years remaining on the mortgage, the savings could equal $90,000 for 20 years and more than $100,000 if over 20 years were left, since most mortgages were written during 2007-08.
This change would be a prime motivator for a borrower to continue staying current on mortgage payments.
The widescale impact would also bring the current values of these homes closer to the original value of the loans on them.
Mark-to-market accounting would cause banks to downgrade first- and second-lien mortgage holdings even when a loan is performing but is underwater. An example: if a mortgage loan is nonperforming but the value of the property is $300,000 and the current mortgage is $400,000, the value of the loan has to be written down.
The reduction in assets and its negative impact on capital ratios could possibly call for another government bailout.
But this approach of lowering interest rates does not preclude mark-to-market valuations.
Helping borrowers to stay current on their mortgage payments and lowering the number of foreclosed properties for sale will slowly create a seller's market instead of the current buyer's market.
Eventually the housing market would see an upswing in values.
The loss in interest income would certainly be less costly than having loans go into foreclosure.
The Treasury also could reduce the dividend due on Tarp to 1%, thereby giving the bank an additional incentive to lower the interest rate on distressed underwater borrowers, and make up for some, if not all, of the interest lost by reducing interest on the modified loans.
The Treasury should pressure banks that have not yet repaid Tarp monies to reduce the interest rates on distressed underwater borrowers so that they will be able to stay in their homes and continue to make more affordable payments.
Reducing foreclosures will lower the number of homes for sale at auction or at decreased prices and bring back the real estate market from its current depressed levels.