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Way out for Banks and Mortgagees
Old 10-15-2010, 09:15 AM   #1
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Way out for Banks and Mortgagees

I was watching the news today, and a commentator related that one of the problems with refinancing is that people were underwater on their homes, and that the 4% mortgage rates that were out there were not available to many.

Seems to me if the banking regulations were changed to allow the banks to refinance these loans for the appraised value of the home at the current rate, and keep the difference between the existing loan and the new loan at the original rate, many would be able to refinance and lower their payments. While this leaves the bank with a secured and unsecured loan, they are really no worse off than they are now. If it prevents a foreclosure than they are better off. The banks would roll the closing cost into the new lower loan, and the borrower would have more money to put back into the economy due to a lower over all house payment.

This seems like a fairly simple solution to part of the mortgage problem, and one that could be put into place by a change to banking regulation rather than legislation. When the market recovers the banks and borrowers would be required to roll the loans back to conventional loans when the market recovers.
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Old 10-15-2010, 01:24 PM   #2
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This seems like a fairly simple solution to part of the mortgage problem, and one that could be put into place by a change to banking regulation rather than legislation. When the market recovers the banks and borrowers would be required to roll the loans back to conventional loans when the market recovers.
I think the credit score is the criteria for determining the interest rate, and the FHA resale requirements are the source of the credit-score scale.

I remember reading that when Paulson was shorting MBSs he was particularly interested in the credit scores of the underlying mortgage applicants... Paulson's analysts found a very high correlation between low credit scores and high default rates.

So perhaps this rules change would have unintended consequences. I don't know if the higher likelihood of making lower payments would compensate for the higher probability of more defaults.
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Old 10-15-2010, 02:39 PM   #3
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You may be right. However, right now there are people that are paying those higher rates, that qualify for a lower rate, and have acceptable credit scores. However, if they paid $400,000 for a home that is now appraised for $350,000 they have to come up with $50,000 to refinance. Seems to me a mortgage at the new rate for the appraised value and essentially an unsecured note for the amount underwater puts more spending money into the economy. This is not going to help the family that can not make payments due to loss of job or those that just bought too much house to start with.

Agreed that the unsecured note is risky, but if the bank forecloses now they are going to loose that money and most likely more.
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Old 10-15-2010, 03:52 PM   #4
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I wonder if the owner of the bad mortgage would subordinated to a second position in favor of receiving most of the loan (I would!). Else the "new " ( second) mortgage be at a much higher rate.
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Old 10-15-2010, 04:33 PM   #5
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I think the problem with this idea is 'The banks don't have any incentive to do it'. If a loan is being paid at a higher rate, why would a bank care? My first assumption was the bank would role closing cost and fees into the new loan and therefore make money. I am not sure that is enough incentive.
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Old 10-15-2010, 04:36 PM   #6
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Why would a bank do that?

If the borrower is low risk... then why would the bank do the deal... they will get their money. On the other hand if the borrow is a high risk... why bother!

The only reason I can think of is if the bank is holding the loan does not want the house back and thinks the borrower is very low risk and might walk-away otherwise.

Unfortunately... people who make bad decisions tend to continue to do so!!! Which takes them back to the risk problem!
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Old 10-15-2010, 04:45 PM   #7
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Seems to me a mortgage at the new rate for the appraised value and essentially an unsecured note for the amount underwater puts more spending money into the economy.
Yeah, I just don't know where an underwater homeowner is likely to say "Oh, wait, now I'm ready to start paying my mortgage again!!"

I'm sure that some financial institutions are privately dropping their credit-score criteria a little at a time, charging extra application/processing fees and keeping the loans on the books, hoping to score some big cap gains when FHA lowers the bar.
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