Interest Rate Roundup

Tuesday, September 04, 2007

Jawboning in action

Remember how I said part of the government's anti-foreclosure plan was to "politely encourage"/strong-arm/jawbone lenders into re-working mortgages for borrowers who want to -- and could afford to -- stay in their homes if their mortgage terms weren't so onerous? Well, now we're seeing the next step in that process.

Per Bloomberg ...

Sept. 4 (Bloomberg) -- U.S. bank regulators facing the worst housing slump in 16 years called on mortgage lenders to stave off foreclosures by easing cash-strapped borrowers' home payments.

The Federal Reserve and the Treasury Department asked companies that process mortgage payments to identify homeowners at risk of falling behind when their loans "reset"' to higher interest rates, the agencies said in a joint statement today. Lenders should try to refinance at lower rates to keep families from losing their homes, the regulators said.

Here's the full version of the statement (PDF link) from the major banking regulatory agencies. It applies to loans that have been securitized. There has been some confusion about the accounting and regulatory implications for mortgage loan servicers that modify loans that aren't actually in default yet (call it pre-emptive modification, if you will). This guidance attempts to ease those concerns.

What type of things might a servicer do in a loan modification? Glad you asked. The statement includes the following examples:

* Deferral of payments
* Extension of loan maturities
* Conversion of adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate
* Capitalization of delinquent amounts

Will all of this stuff work? Well, it can't hurt. Loss mitigation is essential in today's down-in-the-dumps mortgage market. But nothing can change the fact the underlying trends in home sales, prices, and inventory are weak. A lot of factors will have to come together to help turn the housing market around over the longer term, and that's why I still think a recovery won't come about until at least the back half of next year (more likely sometime in 2009).


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