Tuesday, March 25, 2008

Home Sweet Home Mortgage - Opportunity Awaits

Where The Economy and Politics Collide

Mid pleasures and palaces though we may roam,
Be it ever so humble, there's no place like home;
A charm from the sky seems to hallow us there,
Which, seek through the world, is ne'er met with elsewhere.
Home, home, sweet, sweet home!
There's no place like home, oh, there's no place like home!

Last Saturday I forecasted a bifurcated (hah!) fix for the mortgage mess and got an interesting comment on the micro piece. (I love a good comment - Thanks, Anonymous!) The micro piece was designed to alleviate the suffering of individual homeowners / mortgage borrowers. Upon re-reading what I wrote, it appears to make little if any sense, even if I know what I meant. So, let's have more mortgage fun and elaborate here.

"But why?" you may ask. Isn't repeating political gossip more fun? Well, yes. But I don't really know anything right now, and I have figured something out, I think. Everybody has been complaining that the three remaining Presidential Candidates haven't said anything really meaningful to address the current economic problems, especially as they affect homeowners.

Note to self - new reality tv show: The Candid Date. Check availability of Tori Spelling.

So, remembering that stupid old platitude, "There are no problems, only opportunities!" I've spotted an opportunity. The candidate who comes up with a workable solution for underwater homeowners while also benefiting our friends in finance will win lots of political brownie points. So, I'll elaborate on this part of the proposal.

The way a mortgagor/homeowner gets out of a bad mortgage that he cannot afford is to refinance into a better one, meaning one with lower monthly payments. But he can't, because (check all that apply):
  1. He's already late with payments, so his credit score is in the toilet.
  2. He skipped paying other bills to pay the mortgage, so his credit score is in the toilet.
  3. He never really had the income he claimed when he got his "no doc" loan, and can't qualify for a new one because nobody gives "no doc" loans anymore.
  4. The market value on his house has gone down, and he owes more than it's worth.
  5. Other: _________________________

This means that his mortgage loan, which the originator may have sold for 98 to 102 cents on the dollar when it was first made, may only fetch 65 cents on the dollar in the secondary mortgage market today. And that's if it's current on payments. So, basically whoever is holding the loan is sitting on a big loss. The holder is the person or company who bought the loan and is owed the money.

So this knucklehead who bought a house that he couldn't afford, with a mortgage loan that he lied to get, with a payment that he can't make, is in big trouble. I know what you're thinking, "Boo fucking hoo." Well, yes, there is that element. It's what us laymen call, "That's what you get for being a dumbass" but bankers and such are calling "moral hazard," a term that usually comes up in the context of risk management and insurance.

Eureka! A clue. This is an issue of risk management, which is resolved through insurance. That's not complicated! Right. This was figured out years ago when the mbs business first started, and bond insurors stepped in to insure the mortgage backed securities. The two biggest are MBIA and Ambac. They are called "mono-line insurors" for reasons that escape me now, but you won't see All-State or Liberty Mutual doing this stuff. Surprise, now MBIA and Ambac appear to be having financial soundness issues, which is death for an insurance company. But for now we don't care, because they added no direct benefit to the homeowner / borrower anyway.

The government will have to step in and bail out homeowners. Why? Because it is an election year. The problem is that if you are bailing out a debtor, you are really bailing out his creditor, because the creditor will end up with the money in the end. But, while we may have some sympathy for a dumbass who borrowed too much or took out a bad mortgage, we have none for the supposedly sophisticated bankers who lent him the money.

So the challenge becomes finding a way to help the homeowner without bailing out the lenders and investment houses. Here's how:

  1. Set up a temporary program - The 2008 Emergency Mortgage Program (TEMP)

  2. Any homeowner automatically qualifies.

  3. Only owner occupied homeloans qualify.

  4. The government program provides mortgage insurance on 60% of the value of the home.

  5. A new appraisal is required.

  6. The interest rate will be about 1% higher than market rate. Let's say 7% 30 year fixed. This is so the TEMP program will not compete with market mortgage providers.

  7. Participating lenders must accept all qualifying loans. Maybe they are even assigned through a pooled application process.

  8. Participating lenders give an 80% LTV mortgage, meaning the 20% of the home value that is uninsured is true lender's risk capital.

  9. The prior holder is required to provide a loan for the remainder of the balance owed on it's prior loan, either through a second mortgage loan on identical terms as the first, or through an unsecured personal loan at 2% higher interest rate with the same maturity as the new mortgage loan.

  10. The TEMP program can provide a standard set of terms and forms for use in the program.

  11. The key is that the homeowner can participate without any approvals from either the new lender or the current holder of the mortgage.

What is great about this plan is not just that it allows troubled homeowners to refinance. But it forces servicers of troubled loans to rewrite delinquent loans that they may otherwise be contractually required to foreclose on by the terms of their servicing agreements. They are off the hook.

And it is chock-full of new lending opportunities. Most of the actual work here can be done through private (as in non-government) companies.

Barack? Are you listening? It's a plan that people will love! Do you hear me Barack?