How Good is the Mortgage Deal?

If you are a homeowner who kept up on your payments, the deal is not good for you. However, if are one those who fell behind in your mortgage payment or upside down on your mortgage, you would win under an apparent deal between big banks and state governments. The agreement is at least $26 billion. It would help victims of foreclosure fraud and those who are upside down/underwater homeowners (You owe more on your home than what it’s worth.) Some think that this is a wonderful deal. While, Richard Bove, the vice president of equity research at Rochdale Securities, thinks the deal is misguided. 

“Those people lucky or smart enough to stop making payments on their homes may get their loan balances reduced,” he said. “Other beneficiaries of the agreement may be homeowners who have seen the value of their houses drop below the size of their mortgages. They get a freebie that other homeowners who have paid their mortgages down will not get.”

In 2010, an investigation into foreclosure practices, turned into a discussion between the nation’s state attorneys generals and the banks. This evolved into trying to find ways to help underwater borrowers. The deal is believed to include some $20 billion in mortgage refinancings and principal writedowns to discourage struggling homeowners from walking away from their obligations.

But Bove, who called the agreement “the mortgage deal from hell,” said doing so will help those who bought homes with little money down and who either fell behind on payments or stopped paying their mortgages altogether.

Those who brought down their principal with 20 percent down payments and who kept up on their obligations would not benefit, and ultimately could suffer if the mortgage modifications and principal writedowns drag down neighborhood property values.

“The government has selected a small minority of homeowners to get this benefit (1 million of 75 million or 1.3 percent of the total),” he wrote in an analysis. “Homeowners who made large down payments on their homes or made the terrible mistake to pay down the principal on their mortgages do not qualify. Homeowners who made minimal or no down payments will get the windfall benefit of a lower principal repayment or a cash payment.”

The agreement appears headed towards approval with the last of the holdout states — California and New York among them — having signed on.The final hope is that the principal reduction actually could grow to $40 billion.  Goldman Sachs economists recently estimated that the total homeowners helped could be just 520,000.

The Home Affordable Mortgage Program, or HAMP, has been ineffective. It was originally designed to assist up to four million homeowners, actual refinancings have been closer to one million. The main reason for this is the banks. They have made it a nightmare of paperwork and time delays for homeowners. Very few homeowners have actually received relief. The government’s lack of involvement and guidelines for HAMP have left homeowners out in the cold.

 

The banks have taken billions in write-downs in anticipation of the settlement from the foreclosures. The investigators have charged that the banks had employees who processed foreclosures rapidly and often under fraudulent circumstances to clear large backlogs of cases.  These were termed as “robo-signers”.

“It is important to note that the government is not alleging that the banks took homes away from homeowners who were making payments,” Bove said. “Nor is the government arguing that the banks profited from these foreclosures. The basis of offering the benefit to the 1.3 percent winners in this lottery is that the government is unhappy about the way the foreclosures took place.”

The banks involved, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial won’t’ suffer any more material losses,  since they’ve already set cash aside or written down mortgages in anticipation of the settlement.

Bove added that the precedent is disturbing. “There is no sanctity of contracts in the United States. Only fools meet their financial commitments. The non-payers are the truly enlightened.”

The bottom-line is this if you paid your mortgage on time you will not get any relief. If you are underwater or late on your payments, you might see some relief.  We all saw how HAMP worked out. Oh wait, it did not. Do you have any faith on your state doing better than the Federal Government?


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