The Obama administration has failed to accomplish much on the horrendous problem of foreclosures of residential houses. The one workable idea, using the Bankruptcy Code to protect homeowners, passed the House and failed in the Senate. Other plans, like HAMP, have done nothing to stem the problem. Now we have the latest proposal. Treasury will give $1.5 billion of TARP money to five of the worst-hit states, California, Florida, Nevada, Arizona and Michigan. I sat in on a call today to hear details from Diana Farrell, Deputy Director of the National Econnomic Council; Herb Allison, Assistant Secretary of the Treasury for Financial Stability; and William Apgar, Housing and Urban Development Senior Advisor for Mortgage Finance.
The Treasury has identified the problem as underwater mortgages, exacerbated by loss of earnings and underwater second mortgages. Underwater second mortgages are a serious problem, because it is almost impossible to get a workable modification to a first mortgage without getting rid of the second mortgage.
This program is designed to get these five states to create innovative programs to solve these problems. The underlying premise is that it is a good idea to encourage people who are underwater to stay in their homes. I asked why this is a good idea. Why should someone who is underwater continue to pay on a mortgage, when they will wind up paying more than the house is currently worth plus interest? Treasury seems to think this is a good idea, because when or if prices return to normal, owners can recover their down payment. That might make sense for some people, for example, people who made large down payments and are having trouble paying because of job loss. However it is irrelevant to people who took out second mortgages equivalent to their down payment, and to people whose down payment was minimal, and to people in areas where it is unlikely that prices will return to anything like bubble levels.
One plausible plan is to see whether states can figure out a way to buy out the second mortgage, so that the owner can pay the first, perhaps with some modification. That would make sense if the value of the home is within striking distance of the first mortgage. It might well help a small group of people. Baby steps are all this administration can accomplish with Congress dead set against the one thing that will work: allowing Federal Judges to modify mortgages in Chapter 13.
image courtesy Mike Licht NotionsCapital
