Here’s the thing about silver bullets – when tasked with killing werewolves, they’re remarkably handy.
Sadly, that’s pretty much all they’re good for, because in the absence of werewolves, a silver bullet is a lot like a regular bullet – blunt, often imprecise and sometimes capable of doing more harm than good.
A case in point can be found in the Obama administration’s most recent attempt at perfecting and enhancing its existing homeowner mortgage modification programs. Touted as a major breakthrough in finally achieving meaningful foreclosure prevention, the program takes steps to close major loopholes in prior legislation.
Notably, homeowners in otherwise good standing, but underwater on their mortgages through no fault of their own, now purportedly have a viable alternative to simply walking away from their homes or strategically defaulting.
Further provisions to the bill now give previously stubborn second-lien holders more of an incentive to accept principal reductions as part of modification efforts. Rather than being completely wiped out, a second-lien holder now has some hope of recovering some money through principal writedown modification.
These efforts, along with enhanced protection for homeowners in the event they lose their jobs, are laudable and an important good-faith effort on behalf of the administration to address prior modification program shortcomings.
But anyone who thinks these new guidelines and procedures are a silver bullet that will once and for all put this country on the path out of this foreclosure mess is sorely mistaken.
Instead, what these new policies are is simply a new collection of traditional ammo the feds and lenders can use to help stem the tide of foreclosures. Fire more bullets into a dense mass of enemies and you’re all but guaranteed to take more of them out.
But any military commander will tell you that this kind of scorched earth policy carries with it a number of drawbacks, not the least of which is collateral damage, or the destruction of that which you’re trying to save.
New regulations designed to help more underwater borrowers refinance into FHA-backed loans require investors and/or servicers to write down the loan by at least 10 percent, and to 96.5 percent of the home’s value. Said servicers are essentially trading to the FHA the future risk of foreclosure in exchange for some nominal payout.
The more loans that are refinanced into FHA (taxpayer)-backed products, the more servicers and investors are guaranteed to recover, the more homeowners are “saved,” and the more successful the program becomes.
But servicers, logically, will only be willing to dump on the FHA those loans it feels have the least chance of recovery or full payment. In other words, only the riskiest loans get foisted on the government for modification, and the most profitable loans are held onto and not modified.
This policy helps no one. It doesn’t help the homeowner with steady employment and good credit, because a servicer rejects their potential modification in hopes they’ll continue to pay simply because they can. When the homeowner finally gets fed up and strategically defaults, then who wins?
The program certainly doesn’t help the rest of us either. The American taxpayer, already on the hook for billions in bailouts and deficit spending, must now support an FHA newly awash in risky refinances of loans servicers were all too eager to get off their own books in the first place.
Rather than a silver bullet, these new regulations seem more like a silver grenade – likely to address much of the problem, but potentially blowing up more than they fix.
Still, these efforts must be taken for what they are, which is recognition by the federal government that aligning debt with value is how we will ultimately solve the underwater mortgage problem.
We don’t doubt the good intentions at play, we just sincerely hope we’re not on the road paved by the same.
