I have been reading here and there about the proposal by the Treasury department to create a market for the assets which banks are holding and which now are worth far less than anyone is willing to pay for them. I have yet to see anything about how this is going to help homeowners.
Last month the President announced his plan to help people restructure their mortgages. One alternative is for those who are not behind in their mortgage, but who have seen the value of their houses drop, can apply for a refinancing of their loan.
The other alternative applies to people who are behind in their payments. This alternative would allow for an adjustment of the terms of the mortgage so that the payments are as low as 31% of a homeowner's income. Although there are incentives for loan servicers to participate, there is no requirement for them to do so.
Now, in the past week, we have the Treasury proposing this system for getting bad assets off of the books of banks. Some of the assets they are talking about include securities which are backed by mortgages on homes.
The idea is that the government will provide up to 85% of the funds necessary to buy these assets, which will be sold in auctions run by the FDIC.
These loans will be non-recourse, which means that if there are losses, the only source of repayment of the loan will be from the assets which the winning bidder purchased - i.e. the winning bidder is only at risk for the 15% of the money required to purchase these assets which the winning bidder put up itself.
This process, it seems to me, presents an opportunity for the government to require the winners of these auctions to participate in the loan modification program if the assets they purchase include mortgages on a person's principal residence.
However, I have seen nothing in the press which indicates the government is doing this. Does anyone have any knowledge about this plan and whether it includes such a provision?
If not, then the White House, Congress, the Treasury Department and the FDIC all need to feel a little heat on this issue. These auctions have not started yet and they will continue over time.