WTF Finance reported how the proposed solutions for dismantling Fannie Mae and Freddie Mac involve more Government. The two Government Sponsored Enterprises guaranteed trillions of mortgage debt and were bailed out by the U.S Government while continuing to guarantee non-sense loans making up most of the lending environment post-Real Estate bubble implosion.
In August 2010 the U.S. Department of Housing and Urban Development (HUD) announced a new program that would be implemented to help the responsible homeowners that did not fall behind on their mortgage. The NY Times now reports how a significant number of lenders have signed up for this program.
“Six months after the Federal Housing Administration announced an $11 billion refinancing initiative for these “underwater” borrowers, nearly two dozen lenders have agreed to take part in a new loan modification program.
To qualify, homeowners must be current on their monthly mortgage payments and not already have an F.H.A. loan. The size of the new primary loan cannot be more than 97.75 percent of the current value of the property; refinanced loans for homeowners whose properties carry second liens cannot exceed 15 percent of the property value.”
According to the official HUD announcement the qualification criteria are:
“The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.”
According to the NY Times article participating banks in the FHA Short Refi Program include: Wells Fargo, Ally Financial (formerly known as GMAC), Wall Street Mortgage Bankers of Lake Success, NY; 1st Alliance Lending of East Hartford, CT.; Nationstar Mortgage of Lewisville, TX.; E Mortgage Management of Haddon Township, NJ.; and Glacier Bank of Kalispell, MT. 23 more lenders have signed up for the program according to HUD that estimates that approximately 500,000 to 1.5 million homeowners can benefit from the program.
This program illustrates that the Government has absolutely no plans or intention to exit the credit markets and reduce its guarantees on home loans. This week Treasury Secretary Geithner stated before the House Committee on Financial Services that he wants to reform and reduce the role of Government involvement in the credit market and allow for the private lending to make up a majority of real estate lending.
“The Administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit.”
WTF Finance would like to point out that these promises are merely promises to please international investors and provide them with misplaced confidence that the United States is addressing the root of our economic problems and therefore can balance its budget in the future. This HUD program is an expansion of FHA guarantees. The U.S. is not serious about changing its involvement in the credit markets as it otherwise would not have continued to guarantee non-sense loans that no private entity would have made. To give banks the option to take a modest 10% loss on their non-guaranteed underwater mortgages in exchange for Government guarantees on future losses that could far exceed the 10% write down is all but a sign that the Government is willing to exit the credit markets. This is an insurance policy whereas the banks don’t pay the FHA any insurance premium.
The smaller banks that are accepting to take the 10% write downs are making themselves more attractive to a future takeover from a large financial institution as their loan portfolio is now guaranteed.