Posted on Wednesday, January 27, 2010
"Feedback from the Frontline; Why Obama's Making Home Affordable plan is not working"
As a Florida Supreme Court Certified Mediator I've been mediating foreclosure cases at “crisis ground zero,” Miami, Florida (you'll recall first Miami-Dade and now all judicial circuits in Florida will require lenders on primary residences to attempt resolution by “mandatory managed” mediation). The presumption is that most homestead borrowers want a mortgage modification but have been unable to elicit lender cooperation.
Over the past year I've noticed several patterns including: Too many borrowers still not understanding the various alternatives available under Making Home Affordable, namely modification, refinance, short sale or deed in lieu; Many borrowers seeking a modification arrive at mediation with unrealistic expectations including the expectation that principal write downs are being handed out like free samples at Wal-Mart and still do not appreciate the role of their own debt to income ratio in determining housing affordability; Other borrowers inappropriately considering themselves "victims" and the bank the sole cause of their hardship; And far too many modifications being done on a shoe string with borrowers barely documenting sustained ability to pay even the new, lowered mortgage payment (which begs the question, what's going to happen when the modified payments go up again in 5 years to market rates as per the MHA plan and isn't this exactly like qualifying borrowers based on the teaser rates that got them into trouble in the first place?). But just as important, as is abundantly clear from the government's own reports which show that of the million of so borrowers pushed through the MHS system to date, only around 60,000 have landed permanent modifications. Instead, many are walking away from Florida's mandatory mediations further behind the proverbial eight ball, having delayed their foreclosure cases several months and incurred even more costs for which the borrowers will most likely ultimately be responsible vis-a-vis a deficiency judgment.
Lenders and their attorneys are also doing their fair share to gum up the mediation process, each with their own unique policies and procedures which, as it that weren’t enough, continually change over time. Borrowers who focus on their interest rate and costs at closing would have been wiser to ask whether they would receive the work-out benefits of a loan owned or insured by FNMA or Freddie Mac! But the problem is not with mediation itself but rather with the primary solution which is the subject of most mediations, namely President Obama's Making Home Affordable program, a solution that simply doesn't fit the problem (in its defense, MHA was launched last February and crafted long before that, certainly long before we even understood the nature of the problem itself!). A home that is not affordable cannot in most cases be made so by simply temporarily lowering the mortgage payments. You cannot MAKE a McMansion affordable any more than you can MAKE a Bentley affordable. Especially in Florida, borrowers in over their heads will still contend with real estate taxes, insurance, homeowners association, even utility and maintenance expenses beyond their prudent means. Many will no doubt realize they can't or don't want to be married to a money pit, and will default notwithstanding the lower mortgage payment. And, again, even more will default as their payment adjusts upwards in 5 years, perhaps a testament to the historical 60 percent mortgage modification re-default rate.
MHA's other alternatives are not working as hoped either. Home sales in general are not vibrant enough to support the short sale alternative, especially not in the short listed-to-sale time provided for in the program. And deeds in lieu of foreclosure only add to lender REO and market shadow inventory, driving already shaky home prices downward. Most significantly to borrowers, neither adequately addresses potential liability for the deficiency judgment; a subject in need of resolution in an even broader context.
Addressing deficiency judgments is central to a real solution. Absent that, we may well see millions of homeowners haunted by collections firms and poor credit scores as their financial nightmare lives on for years to come (The difference between mortgage loan balance and property market value is also being expressed in terms of proposals for principal write downs. However, conceptually the latter may be said to "reward" borrowers who keep their homes as opposed to the former, which merely would not "punish" them further). Such an initiative, for example a deficiency tax credit, would need to fairly allocate the deficiency between bank and borrower but could be utilized as an incentive for borrowers who practice more prudent debt to income habits or wish to make a more prudent home purchase at a future date, and would encourage those who need to do so to move and begin the financial rebuilding process with more certainty. While the new HAFA plan provides “guidance” suggesting lenders simply forgive deficiencies, it is doubtful that any lender who is not forced to do so (as those who accepted TARP funds no doubt will be) will.
By offering a mortgage assumption alternative MHA could add actual value for buyers, lenders, and the rest of us too by providing the added incentive of an assumable mortgage (at a time when mortgages are no longer as easy to come by)for short sale buyers, replacing unstable borrowers with more qualified ones for lenders, and enhancing our nation's overall home price and sales picture.
Finally, the manner in which each MHA alternative will impact a borrowers credit needs to be clarified. This alone, may provide enough incentive for many borrowers to invest the effort necessary to avoid foreclosure at, get this, very little cost to taxpayers!
Making Homes Affordable is in need of some key changes in order to fit the problem, not the least fo which is a new name, itself a misnomer and gross over-statement of what the program is actually capable of doing.