Friday, October 24, 2008

Modifications Coming?

In yesterday's testimony before the Senate Banking Committee, the FDIC Chairman Shelia Blair revealed that her agency is working with the Treasury to mainstream a new program that will supposedly be the help Main Street has been waiting for.

When Indymac collapsed (and no, I’m not obsessed with Indymac), the FDIC took over.  The Feds froze all the bank's foreclosures.  Since, they have offered 15,000 loan modification proposals to borrowers in trouble.  70% of those have responded to the offer.  3,500 of these borrowers have accepted the new terms; thousands more are in process.

The FDIC thinks this is a great model.  As Luke Mullins reports at US News & World Report, Blair testified, “The hope is that our mortgage relief program can be a model and a catalyst to spur loan modifications across the country. It's a process that most loan servicers can use under existing legal arrangements.”

Apparently, Paulson inherited some extra powers in the bailout bill (we’ll probably be hearing about all kinds of extra special powers for years to come.  I think he's going to be the government equivalent of Harry Potter) that could allow him to encourage (strong arm is such an offensive term) banks to offer workouts with troubled loan holders rather than foreclose on their properties.

Questions remain about who would be offered these workouts and under what conditions. 

I, myself, have an ARM that is due to reset in less than a year.  Currently I could pay about $3000 in closing costs to refi this to a higher rate than I presently have.   But now I’m beginning to think I should just wait and see what’s coming.

I’ll be honest.  Working as a mortgage broker means times are tough.  Of late, it’s an effort to scrape up the money to make my monthly housing payment.  Perhaps, if I stop paying my mortgage now, the government will force my bank to modify my mortgage.  I’ll get a great rate and avoid the refi costs. 

And I could use what I would be paying for my mortgage in the intervening months for a great new stereo from Crutchfields. 

Such is life when there is no moral hazard.

Don’t worry.  It’s just a nasty thought, a fleeting temptation to exploit the system.  But I wonder to how many it will be much more than that?

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