Will the Foreclosure Bailout Plan Save Us?
The U.S. Treasury Department led by Henry Paulson, Treasury Secretary is working on a plan to temporarily freeze the interest rate resets common in many sub-prime mortgages. Los Angeles foreclosures predominantly have this type of loan. Will this plan avert a housing disaster locally or nationally?[googmonify]4494413162:right:250:250[/googmonify]
I suspect not. First, even though the companies may be negotaiting with the feds in many cases they do not have the authority over the entire portfolio. Remember, these loans were securitized, broken up into multiple different tranches, and sold around the world to investors. Frequently the lender is just a servicing agent for a portfolio loan.
So it is possible a number of loans may not be able to be renegotiated before the resets happen. Logistically it could be a nightmare to seperate out who owns what, get the mulitple owners of that portfolio to agree and get this done in a timely manner. Imagine a lender that is a servicer for a 100 different loan packages and each one of those is broken into 10 tranches and you need to have owners of those tranches buy off on a modification in terms. The tranch owner may need to take it to their governing agency for approval. The lender is going to have some work to do to get this organized.
Secondly, while it may be helpful in mitigating some of the effects of downturn and will help some homeowners stay their house, but it will not turn the tide. There are a huge number of investor owned homes. Many of these are negatively cash flowing with their current loans, much less a reset. At NCREI we talk daily with investors that are losing thousands every month on a property, and the property itself is no longer worth what they paid. I suspect many of these people will drop their properties.
Additionally, homeowners in many of the commuter areas, along with seeing dramatic property value decreases are also contending with higher gas prices - how long before they decide to move closer to work?
In the previous downturns, the vast majority of the loans were 30 year fixed rate mortgages. In the last two downturns the interest rates also dropped during the same period that home prices declined and foreclosures soared. So the feds can try to plug some of the leaks in the dike with interest rate drops, and freezes on interest rate resets, but ultimately I think that just as in New Orleans, the dikes will break and the floodwaters will swamp the housing market.