Housing Bill Adds Second Lien Amendment

NEW -> Contingent Buyer Assistance Program
muzie_IHB

muzie_IHB

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<a href="http://www.housingwire.com/2008/07/23/housing-bill-adds-second-lien-amendment-daps-to-be-eliminated/">Housing Bill Adds Second Lien Amendment</a>



"According to a published report, the nearly 700-page long Housing and Economic Recovery Act of 2008, HR 3221, saw a vital new amendment added in final negotiations that would ostensibly give second lien holders some incentive to agree to having their positions wiped out as part of a program that would look to refinance troubled mortgages into loans endorsed by the Federal Housing Administration.



The Act would authorize the FHA to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; the lender must, however, first write-down principal loan balances to 90 percent of current appraisal value.



It?s a proposition that in many cases would mean wiping out second lien holders, leading more than a few market participants to suggest recently that lenders would be unlikely to participate voluntarily ? or, at the very least, that first lien holders would be held hostage by second lien holders.



An amendment added to the bill in compromise negotiations between House and Senate leaders would apparently look to solve this problem <strong>by allowing second lien holders to share in future price appreciation, even as their existing lien is extinguished via the refinancing transaction</strong>.



National Mortgage News first reported on the new amendment Wednesday afternoon in a blurb on the trade publication?s Web site; a copy of the amendment was not immediately available for media review at the time this story was published, leaving some question exactly as to how second lien holders would be impacted and what their position would be.



"



You know, I've been reading the Irvine Housing blog for quite a while, read all the blogs & analysis, and I was pretty convinced that, eventually, the housing markets would return to normal valuations where standard folk could buy homes without undue risk to their financial situation.



Today, I'm beginning to have my doubts.



There's an enormouse amount of government effort being put out to bail out banks and insolvent homeowners, which can only prop up house prices. Despite all the logical analysis, you can't fight billions of dollars being thrown at the problem, at the taxpayer's expense.



I'm beginning to wonder if this will not morph into a 10-year period of unnaffordable housing with prices essentially flat, instead of a protracted decline. Any thoughts?
 
That's very interesting. All along I didn't think the bill would do anything for troubled owners here in CA because the seconds would be wiped out and the firsts would also have to take a write down, which essentially puts the lenders in the same position as accepting a short sale. Since very few of them have been willing to work out a short sale, I didn't think this bill made that much of a difference here. In other markets, it might.



I guess what the big question is how the second holders would account for their stake in future appreciation. It's not like you can quantify that. Does anyone know how a bank would show a share of future appreciation on their books?
 
Does anyone have an idea how much these lenders will make on the fees when they re-write the loans? Is it any concern that the man spearheading this bill is member of Mozilo's Club? For the love of god, what more can our government do to disenchant our youth, and saddle them with so much debt they'll still be digging out of their parents hole when they're 65 with nothing to show for it?



By the way, the tax credit for BUYERS, is a crappy $7,500 and can only be used by a single person who makes less than $75K. WAY TO GO CONGRESS! Give more credit to people who can't afford the house.



These guys are unbeleivable....
 
Washington is out of touch with the country. They don't know what goes on outside of the beltway.



This bill was about doing something so that the democrats could show the nation they care about the housing problem. Whether it is effective or not was irrelevant. It was also about throwing some support to the banking industry because no one wants large banks to fold, that would be a disaster. Finally, the republicans came on-board because it throws a lifeline to Fannie and Freddie.



Personally, Fannie and Freddie need to be nationalized period. Then combined and shrunken.
 
I read on JtR's site that the $7500 is actually a zero interest loan that must be repaid @$500/yr for 15 years. immediately payable on sale.
 
[quote author="jimbo" date=1216933871]Does anyone have an idea how much these lenders will make on the fees when they re-write the loans? Is it any concern that the man spearheading this bill is member of Mozilo's Club? For the love of god, what more can our government do to disenchant our youth, and saddle them with so much debt they'll still be digging out of their parents hole when they're 65 with nothing to show for it?



By the way, the tax credit for BUYERS, is a crappy $7,500 and can only be used by a single person who makes less than $75K. WAY TO GO CONGRESS! Give more credit to people who can't afford the house.



These guys are unbeleivable....</blockquote>


Isn't it moronic?
 
[quote author="freedomCM" date=1216969215]I read on JtR's site that the $7500 is actually a zero interest loan that must be repaid @$500/yr for 15 years. immediately payable on sale.</blockquote>


If we qualified for that, we'd take it in a heartbeat and not feel guilty. Personally, I don't have a problem with this piece. Giving people a leg up that isn't a hand out isn't necessarily a bad thing, IMHO.
 
This bill seems to be cleverly written to pit all the players into spirited competition. The home debtor hopes that the price of his/her house will crash because their payments will be based on a fixed rate mortgage based on the current appraised value of the house. The less the house is worth, the less the home debtor has to pay to remain in the house. The first mortgage lender hopes that the price of houses remains high, so that they get a larger portion of their loan back. The more outragous the terms of their original loan, the more money they are likely to lose. It looks like a fairly effective plan to stem a complete housing panic, but there will still be an inevitable downward pressure on housing prices. The big winners are the home debtors who can say in their home for lower payments than their original loan called for with the only consequence being that they have to split half their ill gotten gains with Uncle Sam when they finally sell their house. I think the biggest losers will be first time home buyers who will not see some of the bargains that would result from a housing collapse. The taxpayer gets to foot the bill for propping up Fannie and Freddie who get hung with much of the loan losses. I have to believe that congress hit a home run with this bill, nobody will be happy.
 
This bill does nothing except cause the media to report that the politicians are taking some type of action to help the housing market.


Put yourself in the lender's shoes for a second. As evidenced, you have little to no desire to modify loans to preclude foreclosure, and now Congress tells you that if you modify and subject yourself to 100% government constraint on your subsequent actions, you will participate in some supposed future appreciation?


90% of the home debtors facing foreclosure who participate in this program will end up in foreclosure anyways. And this will cost taxpayers ten times whatever this program saves the homeowners or banks. The idea that the government can change market psychology is naive at best.
 
awgee,



Actually there is an incentive for the primary lender. If they can hurry and get the refinance done, possibly stretching LTV, they probably can get the debtor into a mortgage at a home value higher than what it will eventually settle in at. Agreeing that the debtor probably defaults anyway, the gov't is now on the hook instead of the primary lender. This wouldn't have worked in the original legislation, since the secondary holders wouldn't have agreed to it. However, they amended the bill last minute to allow the secondary holders to participate in the sharing of future appreciation. Even with the recent price drop, some owners (esp in Orange County) still can't afford afford their homes on a fixed mortgage given LTV requirements, but given changes to this bill a lot of additional mortgages will get reworked. In the end a second leg down in home prices and foreclosures are going to get picked up by taxpayers instead of the banks and this could stretch out the period in which we would have seen a bottom on the housing market from 2009/10 to who knows when.



I was really hoping that Congress would pass a bill that sounded good, gave them the political support they're aftern, but did nothing. Unfortunately, changes to the legislation are giving it a bit more teeth, which negatively impacts families that demonstrated good financial sense and will end up costing the tax payer.
 
[quote author="uppercuts" date=1217028053]awgee,



Actually there is an incentive for the primary lender. If they can hurry and get the refinance done, possibly stretching LTV, they probably can get the debtor into a mortgage at a home value higher than what it will eventually settle in at.</blockquote>


Possibility stretching LTV? None. Have you read the news lately or read the posts from mortgage brokers?



[quote author="uppercuts" date=1217028053] Agreeing that the debtor probably defaults anyway, the gov't is now on the hook instead of the primary lender.</blockquote>


This is the part that will cost five times more than if the lender foreclosed. It doesn't take a genius to consider just how good the government is at engaging in business of any sort. And <strong>IF</strong> the lender agrees to the writedown, they have to take an immediate loss on their cash flow and balance sheets; something they are avoiding like the plague.



[quote author="uppercuts" date=1217028053]

This wouldn't have worked in the original legislation, since the secondary holders wouldn't have agreed to it. However, they amended the bill last minute to allow the secondary holders to participate in the sharing of future appreciation. Even with the recent price drop, some owners (esp in Orange County) still can't afford afford their homes on a fixed mortgage given LTV requirements, but given changes to this bill a lot of additional mortgages will get reworked. In the end a second leg down in home prices and foreclosures are going to get picked up by taxpayers instead of the banks and this could stretch out the period in which we would have seen a bottom on the housing market from 2009/10 to who knows when.



I was really hoping that Congress would pass a bill that sounded good, gave them the political support they're aftern, but did nothing. Unfortunately, changes to the legislation are giving it a bit more teeth, which negatively impacts families that demonstrated good financial sense and will end up costing the tax payer.</blockquote>


This will cost the taxpayers billions and do nothing for homeowners. It will probably not even do anything for the lenders whom it was actually designed to bail out. Any workouts will need an accurate LTV and full documentation. It ain't gonna happen. The last thing in the world these home debtors and lenders want is their fraudulent paper exposed.
 
If you're a lender in the second position......and the borrower is upside down......and the party in the first is willing to take the cramdown/piggyback.........what is the seconds motovation to say "okay, we'll just write it off so the customer can split the difference with the government and himself"?



This isn't moral hazard, it's like robbing a bank (literally).



No way do these guys sign off. Off to Bustoville for you, Mr/Mrs. Borrower.
 
Vas,



The incentive for the second holder (if they're truly upside down) is that in the foreclosure process they'll probably get zip. At least this way they "might" get something off future appreciation. Obviously this will be case by case.
 
[quote author="stepping_up" date=1216978622][quote author="freedomCM" date=1216969215]I read on JtR's site that the $7500 is actually a zero interest loan that must be repaid @$500/yr for 15 years. immediately payable on sale.</blockquote>


If we qualified for that, we'd take it in a heartbeat and not feel guilty. Personally, I don't have a problem with this piece. Giving people a leg up that isn't a hand out isn't necessarily a bad thing, IMHO.</blockquote>




i read in the NYT this morning that there is a phase-out for the first time buyers credit starting at $75k/$150k and finishing to zero around $95k/etc







Mostly, I think this bailout won't help much in CA, NV, FL, AZ. the dollar levels are too low, and these markets still have more than 15% to depreciate.



It may help stabalize the vast rest of the country, where the median price is that amazing $180k.
 
[quote author="uppercuts" date=1217033401]Vas,



The incentive for the second holder (if they're truly upside down) is that in the foreclosure process they'll probably get zip. At least this way they "might" get something off future appreciation. Obviously this will be case by case.</blockquote>


If you are a stockholder in Bank X, are you OK with giving the guy a pass on paying you back, so the borrower can get a freeroll at the appreciation?



If you're an employee with Bank X, do you expect to keep your job if you sign off on this cock and bull story?



From a functional standpoint, this is deal is dead for just about anyone in California who bought after 2003 or pulled equity out.
 
Let's think for a second. It is proven to be less costly for lenders to initiate some type of workout than go through foreclosure, so why do the lenders insist of letting the properties go to foreclosure when they know it will cost them more a workout?
 
[quote author="no_vaseline" date=1217036579][quote author="uppercuts" date=1217033401]Vas,



The incentive for the second holder (if they're truly upside down) is that in the foreclosure process they'll probably get zip. At least this way they "might" get something off future appreciation. Obviously this will be case by case.</blockquote>


If you are a stockholder in Bank X, are you OK with giving the guy a pass on paying you back, so the borrower can get a freeroll at the appreciation?



If you're an employee with Bank X, do you expect to keep your job if you sign off on this cock and bull story?



From a functional standpoint, this is deal is dead for just about anyone in California who bought after 2003 or pulled equity out.</blockquote>


Think of it this way. If you had a chance for $0 and nothing or $0 and possibility at some type of gain... would you take it? Of course you would.



Also here's the answer why the first time buyers are getting no help- if they were then the "possible" pick-up in demand might just give the second and first holders some glimmer of hope they could foreclose and get a better price. The government want the lender to feel like they have no other option.
 
[quote author="uppercuts" date=1217028053]

This wouldn't have worked in the original legislation, since the secondary holders wouldn't have agreed to it. However, they amended the bill last minute to allow the secondary holders to participate in the sharing of future appreciation. Even with the recent price drop, some owners (esp in Orange County) still can't afford afford their homes on a fixed mortgage given LTV requirements, but given changes to this bill a lot of additional mortgages will get reworked. In the end a second leg down in home prices and foreclosures are going to get picked up by taxpayers instead of the banks and this could stretch out the period in which we would have seen a bottom on the housing market from 2009/10 to who knows when.



I was really hoping that Congress would pass a bill that sounded good, gave them the political support they're aftern, but did nothing. Unfortunately, changes to the legislation are giving it a bit more teeth, which negatively impacts families that demonstrated good financial sense and will end up costing the tax payer.</blockquote>


This will cost the taxpayers billions and do nothing for homeowners. It will probably not even do anything for the lenders whom it was actually designed to bail out. Any workouts will need an accurate LTV and full documentation. It ain't gonna happen. The last thing in the world these home debtors and lenders want is their fraudulent paper exposed.</blockquote>


Fundamentally, I think we all need to understand that where prices will settle is dependent on what the buyer can afford now... not comps, not supply and demand (for now), but simply the availability of credit. It's true, some of these morons that are in default make so little money that an outside buyer can come in and pay a higher price without help, in which case the current owner will get booted regadless of the legeslation. But I feel the majority of people in trouble now are on fairly similar footing (in terms of income to total debt) with the would be buyers, and can produce documentation to show it.
 
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