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Minyan Mailbag: An Alternative Homeowner Rescue Plan


...any homeowner rescue plan that includes an appraisal will be the proverbial squirt gun at a 5-alarm fire.



You're always good for reminding us to read more than just the headline so here is the best I can do so far:

FHA to implement new "FHASecure" refinancing product... (see the article here)

I am waiting on the release of what is called a mortgage servicing letter which will provide more detailed instruction to underwriters. I was told this was coming yesterday (I get them e-mailed to me automatically) but I have not yet seen it.

My two cents: any homeowner rescue plan that includes an appraisal will be the proverbial squirt gun at a 5-alarm fire.

My suggestion: de-link the debt from the property and the property value. The borrower becomes indebted to the lender, insured by the FHA against default, for 40 years. If the borrower moves and sells his/her house and replaces it with another then the mortgage is modified by changing the underlying property. This allows a refinance without concern for appraised value, not an exact science anyways, and opens up the transfer of properties even if the seller would otherwise be owing money at the closing.

It also has an underlying benefit of continuing the amortization of the debt, rather than starting at the beginning of some new term. I would only make this available to current non-delinquent borrowers - any plan that rewards delinquent borrowers over current ones is doomed politically and socially. I would help delinquent borrowers with a two stage plan: first is some forbearance plan that modifies the loan temporarily. If the forbearance plan is complied with say over 12 months, then make the borrower eligible for the first part of my plan.

In my experience payment history is 99% of the evaluation of a borrower: everything else is less important and is just a farce and a way to increase the rate or fees to the lender under the now ironic fear of increased risk.

Lenders ordinarily would never let this happen - as it should lessen churn, and thus fees, but these are not ordinary times.

Hope everyone read the full text on Bernanke's real estate paper. Under the radar is page 7, first full paragraph - "High interest rates on loans reflected the illiquidity and the essentially unhedgeable interest rate risk and default risk associated with mortgages." While he was talking about pre-depression mortgages, I think his true feeling on the GSE's are revealed.

-Minyan G

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