Will the federal government start backing loan modification programs en masse?
We could see a program where the Federal Government encourages lenders to modify loans as soon as this week.
This morning, White House Economic Advisor Larry Summers was on ABC News talking with George Stephanopoulos about the Economic Stimulus Bill that should get passed this week and an excerpt from their conversation about loan modifications is below:
STEPHANOPOULOS: Let me ask about that financial overhaul. Originally, Secretary Geithner was supposed to give that speech tomorrow. Administration officials are telling me it’s now more likely on Tuesday?
SUMMERS: Yes, I think there’s a desire to keep the focus right now on the economic recovery program, which is so very, very important.
STEPHANOPOULOS: So Tuesday it is. Let me show what’s been reported so far about the elements, the broad-based elements of what are in the plan that you’ve been working on with Secretary Geithner: a proposal to insure banks against more losses, as has already been done with Citibank; some kind of a facility to purchase the toxic assets, although that may be done through trying to encourage private investors to buy up the toxic assets; injecting more capital into the banks; increased lending by the Federal Reserve; and, of course, foreclosure relief for homeowners.
Are those the basic, broad principles inside the plan?
SUMMERS: You know, I’m not going to get into previewing Secretary Geithner’s announcement, but I can tell you this: The focus is going to be on increasing the flow of credit and doing it with transparency, with accountability for those who receive support, and with a kind of consistency that, frankly, we haven’t seen so far.
So, yes, there will be support for banks so that they remain stable, are in a position to lend. There will be support for the credit markets more generally. And absolutely critically, there will be support and pressure that assures that these needless foreclosures are avoided and that government is acting aggressively to contain the damage in the housing markets.
STEPHANOPOULOS: So it’s probably $50 billion to $100 billion in the package to prevent these foreclosures?
SUMMERS: The president’s made clear that he’s very committed to foreclosures. I expect that it will be $50 billion or more that will be directed at providing support for the housing sector of our economy.
STEPHANOPOULOS: And there was a — a report in the New York Times yesterday that this plan would not require banks to start — to start lending or to lend more. Is that true?
SUMMERS: The program will have — I’m not — as I say, George, I’m not going to get into describing Secretary Geithner’s program…
STEPHANOPOULOS: But that’s a pretty fundamental point.
SUMMERS: But he will be — he will be proposing a program that will make certain that we are stabilizing this system and increasing credit — credit flows, because that’s got to be — that’s got to be the objective to increased credit flows.
From the Washington Post this morning:
“Geithner is likely to roll out a plan, worth $50 billion to $100 billion, to encourage the modification of mortgages for homeowners who are otherwise at risk of being foreclosed upon. It could be based loosely on a strategy for foreclosure relief engineered by FDIC Chairman Sheila C. Bair when the FDIC took control of the failed bank IndyMac last year. Extensive details of how the plan will work may not be complete by tomorrow’s speech, however.
“Institutions that get assistance will have to participate in loan modifications and meet other standards that we set,” Geithner told the House Democrats yesterday, the sources said.”
Is the Federal Government going to really spend $50-100 Billion on loan modification programs?
We should know for sure by Tuesday.
{ 7 comments… read them below or add one }
Someone please tell the banks about this; I have gone through almost a year of promises of forbearance, loan modification etc. in the last 3 months I have submitted $6,000.00 so that my loan modificaion will be “easier to get” and I am no closer to any assistance. Incidentally, I have left 23 messages on the answering machine of my assigned ‘loan rep’ not one return call…this is not counting faxes, letters, and e-mails. Indy! you were supposed to be Ms Bair’s model program!?
@Ernesto,
Thanks for stopping by and leaving a comment.
This is not the first time that I have heard these stories about people attempting to get their loan modified – good luck and please keep us posted on your success.
Justin
Treasury Secretary Geithner and the 2 Ton Elephant in the Room
There is talk of loan modification to help solve the mortgage foreclosure problem. This is fine, except for one simple fact. The borrower will still be in the position to try keeping current on the modified mortgage. Based upon past research studies and the latest OCC stats, we can expect a high rate of Re-Default because we are overlooking the “2 Ton Elephant in the Room.” Everyone is ignoring the fact that the borrower need guidance to overcome his “Financial Ignorance”.
The economic plan, in effect, places the US government (taxpayers) as bearing the loss if things don’t go as intended. The growing concern is that these losses will materialize with defaults and re-defaults. There is also concern about the 2nd Wave of Foreclosures involving the “Toxic” Mortgages and the projected 8 million foreclosures expected over the next four years.
There is a lack of confidence on the part of the banks to be willing to lend to consumers and small businesses, and there is a lack of confidence in consumers and small businesses that they will be able to pay it back.
Consumers, borrowers, and small business owners lack the ability to make sound and informed financial decisions. It can be argued that the borrower’s lack of knowledge in financial management was the primary cause of the Subprime Mortgage Crisis which precipitated the Credit Crunch and our current economic woes.
It seems that the key to a solution of this crisis IS THE BORROWER!
Many recognize that the contributing factor to most of our economic problems is the consumer’s lack of financial understanding. He is like a “Boat without a Paddle” when it comes to managing money and making money choices. Everyone is betting that the borrower will default and foreclosures will follow. The high rate of foreclosure and Re-Default should have been expected because the borrower has no concept of managing money.
Loan modifications or any other form of bailout will not save these borrowers. These measures will fail because the borrower is still financially ignorant. Note that even with loan mods the Re-default rate is 60% within 6-8 months.
Let’s finally address the real issue which requires developing a program of “Immediate and Specific Financial Guidance” to help the Borrower understand how to manage his financial affairs.
The Borrower is in desperate need of “Financial Guidance” in this complex economic environment that requires “informed” financial decision-making. The Subprime Mortgage Crisis, out-of-control consumer spending and credit card usage, and the spike in foreclosures and bankruptcies provide evidence of that fact.
We must develop a program of “Immediate and Specific Financial Guidance” that will help the Borrower “naturally” be able to make the monthly mortgage payment. This program is NOT the so-called Financial Literacy initiative that simply disseminates “information” and takes forever to complete, but rather it is a program that will help the Borrower “understand” how to manage money in the shortest possible time and avoid the pitfalls that have previously caused financial
distress.
As the Borrower is successfully guided to avoid default, the financial and housing markets will respond favorably. The result will be a reversal of the downward trend in the valuation of the “troubled assets”.
If we are successful, we can turn this crisis “all around” and stimulate the economy “naturally” rather than by “bailout” which does not guarantee success.
Instead of the expected losses, the US government (taxpayers) will benefit from the unexpected gains that will result as these investments grow in value.
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Tel: (732) 493 – 4799
Email: bornsteinsong@aol.com
@ Professor Bornstein,
Thanks for your insights!
I personally have spent plenty of time in the classroom learning from super-smart folks such as yourself (BYU MBA ’99) and after having worked with the general public for a number of years regarding financial matters…
When you say:
“This program is NOT the so-called Financial Literacy initiative that simply disseminates “information” and takes forever to complete, but rather it is a program that will help the Borrower “understand” how to manage money in the shortest possible time and avoid the pitfalls that have previously caused financial distress.”
I can assure you that the majority of the American public could benefit from a few financial literacy lessons – AND – whatever else it would entail to help the Borrower “understand” how to manage money as well as avoid the pitfalls that have previously caused financial distress.
If anyone has the credentials to get Treasury Secretary Geithner to listen to them… maybe you do?
Justin
PS I currently am keeping tabs on a small handful of individuals who are attempting to get their loan modified – and plan on sharing their stories over time. Stay tuned for individual stories that will highlight many of your points — or so I think.
I doubt the study of re-defaults noted the payment ratio of the modifications. Many are unaffordable on their face, ie: 40-50% or more of borrower’s income. I know a nurse whose deceased husband had gotten a mortgage that she could not afford after he died a little over a year ago. After depleting her savings, the modification she was offered was…100% of her take home pay! Pray tell, what kind of budgeting skills do you use to make that payment plan work?
@Hattie,
Thanks for stopping by and commenting.
No matter what any study says about the re-default rate on a loan modification, I think your point is well taken —
Each individual situation is just that — individual!
There are many situations where budgeting skills are not the problem (for reasons similar to the one you listed above) and in upcoming posts, we will be sharing some of those individual situations.
Justin
The word on the street in Washington is Mo Mod, it is a comprehensive appraisal platform that physically inspect the property and provides a valuation to the bank or financial institution. This would protect the taxpayer and provide rapid response to Main Street. Sources told me it has the capacity to handle 750,000 appraisals per month. That is great, this would make a great start. Go Mo Mod! Go
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