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Could ‘Mark-to-Market’ Mortgages Save Las Vegas’ Home Market:
Posted on March 2, 2009
U.S. President Barack Obama’s $75 billion plan to help families avoid foreclosure should be bolder. While it is a meaningful rescue attempt that may help 9 million Americans, it could be doomed unless mortgage issuers have to write down principal to reflect current market values. The odious (to lenders) concept of a “mark-to-market” mortgage might be one way to put a floor on home-price declines. Why not give those in or facing foreclosure a haircut on principal? About 20 percent would be fair, reflecting the national decrease in house prices. And, what about the diligent souls who have been paying their mortgages all along? Lower mortgage rates reflecting the Federal Reserve’s cost of funds -- about 1 percent, plus 2 percentage points of profit for the lenders -- would be beneficial. That may boost new-home sales, re-sales and refinancing. A strong new mortgage law could limit write downs before a foreclosure hits the overcrowded court system.
To avoid abuse, mark-to-market would be used only as a last resort; after all other options are exhausted. In its current form, though, the Obama mortgage bailout relies mostly on voluntary interest-rate modifications for relief through Fannie Mae and Freddie Mac, the government-seized mortgage companies. Designed to keep people in their homes; the plan calls for reducing rates so that monthly payments are eventually no more than 31 percent of household income.
The plan has shortfalls; if Congress sanctions mortgage write downs or “cram-downs” in bankruptcy court each judge may be allowed to forgive as much principal as deemed appropriate. Even if a homeowner avoids bankruptcy and heads straight to foreclosure, a bank that repossesses the home can lose 40 percent or more in fees, commissions and discounting when the lender finally resells it. Marking down 20 percent in principal would be a relative bargain.
That’s where a write down cap would come in. Index it to local real-estate prices. When there’s a recession, you are more likely to get a break. If you have positive equity, it’s unlikely you will write it down. Mandatory Counseling: combine the write down and bankruptcy provisions with mandatory counseling and screening. That might stem future defaults, which have been occurring in 57 percent of Fannie’s and Freddie’s loan modifications.
Everyone has a stake in a sensible solution to the crisis. If your neighbor’s home goes into foreclosure, it will depress your property value and often lead to an increase in crime. The whirlpool of defaults also contributes to lower consumer spending, constricted bank lending and even lower home prices, which dipped almost 19 percent in December. Hard times require bold systemic changes!
Comment Posted on "Could ‘Mark-to-Market’ Mortgages Save Las Vegas’ Home Market:"
1.
David OttoPosted March 2, 2009 11:12 PM
Marking down residential house prices to something approximating market levels, may be the fastest, and least painful way of finding our way out of this downward spiral. And as you say, it may be a relative bargain for the lenders. About 30% of several of the biggest banks and insurance (investment) companies are already or soon will be owned by uncle Sam. It's only right that the taxpayers get the break as opposed to the robber barons. Excellent idea.
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