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In the past, discussions about how to help distressed homeowners have focused on making banks take principal reductions on mortgages and positioned homeowner relief as a zero-sum game between the government, banks, and homeowners.  However, the decline in mortgage interest rates makes possible a scenario that, in theory, can benefit all parties.  In brief, here’s how it would work:

1)    GSEs issue 30 year callable bonds at 2.5% - 3% effective yield (see here for current secondary market prices showing that is a competitive yield).

2)    GSEs uses the capital raised to offer special refinancing offer to distressed homeowner and bank that would reduce the homeowner’s monthly payment and provide non-dilutive capital to the bank:
     a.    Up to 33% of the current assessed value of the property can be refinanced with a 30-year fixed rate mortgage at 4% interest provided the homeowner and current note-holder agree to the following conditions:
          i.    All penalty or accumulating unpaid interest is forgiven by the current note-holder.
          ii.    The current note-holder pays all administration, closing, and servicing costs on the refinancing note.
          iii.    The full amount of the new loan is used to pre-pay principal on the existing note, providing a partial liquidity event to the current note-holder.
          iv.    The existing note-holder enters into a subordination agreement that positions the principal and interest from the GSE refinancing event as first-lien.

3)    GSEs attempts to sell their new notes to private investors.

What happens to each party:

1)    The GSE profits from the rate spread between the bonds they initially issued and the notes they purchase with the proceeds.  Given the first-lien position of the new notes and the fact that they are secured by a property currently worth at least 3x the value of the note, the GSE is almost assured a nominal profit.  Only if property values drop more than 66% from their current levels would the GSE notes’ principal be in jeopardy.

2)    The banks holding distressed notes would be able to realize a partial liquidity event without necessarily triggering a write-down of any of the remaining balance.  The big banks need additional capital and this would enable them to raise non-dilutive capital on fairly attractive terms.

3)    The homeowners would be able to stay in their houses and significantly reduce their monthly payments.  If they are currently paying a 5.5% interest rate on their entire 30-year mortgage, the new terms would allow them to pay 4% on 33% of the loan and 5.5% on the remaining 66%.  This reduces their annual mortgage interest by 0.5% of the total outstanding balance each year.  In other words, if they owe $300,000 on their house, their mortgage interest will be reduced by $1,500 that year and their monthly payment over the life of the loan will be reduced from ~$1703.37 to ~$1610.46 or >5% every month.

Everybody wins!


Would you support this plan?

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50%2 votes
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| 4 votes | Vote | Results

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Comment Preferences

  •  I'm not sure the banks would go for it (1+ / 0-)
    Recommended by:

    1) I thought the Banks had money to lend, and no demand, so I'd like a citation that they need a capital infusion.

    2)  Liquidity right now is not good for the Banks, because there is nowhere good to lend it.

    3)  By moving from first to second Lienholder, the banks would be in a much riskier position, and would want additional compensation for it.

    Not that I think something like this shouldn't be done, just that it would have to be forced on banks.  (Which could have been done during the TARP era, but Bush was still Prez when that passed, as many people forget.

    Numbers are like people . . . Torture them enough and they'll tell you anything.

    by Actuary4Change on Mon Sep 26, 2011 at 01:44:26 PM PDT

  •  And what happens to people who are significantly (0+ / 0-)

    underwater?  My daughter's house is worth about 200K less than purchase price in 2007.  She's tried to refinance, but bank won't do it because she's too "upside down".

    He that hath the worst cause makes the most noise - Thomas Fuller

    by Hanging Up My Tusks on Mon Sep 26, 2011 at 01:51:06 PM PDT

    •  Exactly What This Would Be For (0+ / 0-)

      That is exactly the type of situation that this "special" refinancing program would be designed for.  Since only 1/3 of the total loan is being refinanced, and the new note is placed in a first-lien position, there is very limited risk to the new noteholder.  As a result, the GSE doing the refinancing would be happy to give your daughter a loan.

      As indicated by another commenter above, the bank's willingness to cooperate would depend on their specific capital needs (whether they would be willing to subordinate in return for partial prepayment).

      •  Thanks for clarification.......I appreciate it. (0+ / 0-)

        I've been really worried about my daughter's situation and if there's some sort of program out there that will help her (and the zillions of others in the same shoes) out, I'm all for it.  

        He that hath the worst cause makes the most noise - Thomas Fuller

        by Hanging Up My Tusks on Tue Sep 27, 2011 at 01:38:49 PM PDT

        [ Parent ]

  •  I suppose (0+ / 0-)
    3)    GSEs attempts to sell their new notes to private investors.

    these are sold to the 1%, who already own us lock, stock and barrel......

    I say overhaul the entire system....

    Please do not tell me you are involved by being a member of DK4.... really get involved...... The goal is not to bring your adversaries to their knees but to their senses. -- Mahatma Gandhi

    by Mindmover on Mon Sep 26, 2011 at 01:51:51 PM PDT

  •  What's a GSE? (2+ / 0-)
    Recommended by:
    sewaneepat, jdmorg

    That's sort of important to this discussion, and you don't define it.

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