President Obama is set to unveil his new "Foreclosure Prevention Program" in Phoenix on Wednesday.  While the details are not clear, there are a few proposals kicking around.  John Schoen of MSNBC outlined one proposal on Friday:

The foreclosure prevention package is expected to contain a number of measures designed to work in concert. One proposal would draw on $50 billion in funds already approved for the financial bailout to buy up millions of mortgages at a discount.

A $300,000 mortgage on a house now worth $200,000, for example, might be bought at a 30 percent discount. The homeowner then would be able to refinance the smaller mortgage with lower monthly payments. The government could then sell the loan back to investors, freeing money to buy more loans.

Of the roughly 10 million to 12 million households facing foreclosure over the next four years, the buyback plan could help between 4 million to 5 million to keep their homes, according to John Taylor, president of the National Community Reinvestment Coalition, who met this week with White House officials to discuss the plan.

So let’s think about this.  According to Bloomberg’s Kathleen Howley on Friday:

Almost one of every five U.S. loans was “underwater” at the end of the third quarter.

That is likely to be worse now.  Is the government going to refinance all of these loans, or only those where borrowers are having trouble making payments.  If they are having trouble making payments, is it certain that adjusting the mortgage to the property’s value is going to change that?

Then there’s the financing issues. The owner of this property now owes $200K on a property worth $200K, so they are going to need 100% financing.  It shouldn’t be hard to get that from Uncle Sam, he’s pretty free and easy with the money these days, but how excited are investors going to be about these loans?  A troubled borrower with no equity isn’t exactly the borrower of choice for most investors.  Sure, there will be government guarantees, but won’t these be low return, high risk loans? [Howley also stated that the FDIC is assuming a 33% re-default rate on loans modified this year.] I suspect it’s more likely that the government will be stuck with these loans than selling them off.

In addition, is $200K really the rock-bottom price for this property?  Again from Howley:

The Obama Administration wants banks to offer loans with easier terms to more than 2 million borrowers in danger of defaulting on their mortgages, twice as many as 2008. That won’t stem the foreclosure crisis if prices keep falling.

A third of owners will walk away when the value of their homes drops 20 percent or more below what they owe, even if they can afford the payments, a situation known as “rational default,” said Norm Miller, director of real estate programs at the University of San Diego School of Business Administration.

I agree with Mish’s assessment:


Banks are more than happy to halt foreclosures because the plan will allow them to dump $50 billion in troubled loans straight off their balance sheet right on to the balance sheet of taxpayers.

I suspect that $50 billion will soon become $250 billion. This plan is not about foreclosure prevention. It is a fraudulent scheme to dump toxic waste on unsuspecting taxpayer bagholders.

Here’s more on the debate from CNBC:

 


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