Realty Check

Here's One Rescue Program Squarely On Side of Homeowner


I want to float an interesting mortgage rescue idea from the National Community Reinvestment Coalition. The group’s president and CEO, John Taylor, will advocate it before the House Financial Services Committee this afternoon.

We all know that the biggest roadblock to mortgage modification is and has been the loan servicer and that servicer’s responsibility to its investors. So many loans during the housing boom were pooled and sold off to investors that it became close to impossible for the servicers of those pools to get permission across the board to change the terms of individual loans.

Government rescue programs for troubled borrowers, like Hope For Homeowners, require lenders/servicers to write down principal in order to participate, and the result has been alarmingly few applications. The program was recently deemed a failure by its own leadership.

Taylor and the NCRC are proposing a new government program, using TARP money, whereby the government would “use its power of eminent domain to take troubled properties/loans from mortgage servicers and lenders, so large numbers of loans could be modified, writing down principal and interest rates. The loans would then be re-sold to the private market.”

The government would buy these loans at a “steep discount.” Eminent domain allows the government to take an asset where a public purpose is served, and it requires that they pay the investor the “fair market value” for it. NCRC claims the fair market value would be about 30-50 percent of the current loan value.

NCRC argues, “Discounting the purchase of these loans would strike a balance between assisting homeowners and ensuring that lenders, servicers and securitizers are not rewarded for financing and servicing predatory and price-inflated loans.” That discounted price would then “be sufficient to write down the loan balance of millions of loans such that they can be permanently refinanced or modified to ensure long-term sustainability.”

It’s not too crazy, no? I mean, if you’re of the opinion that these borrowers should in fact be saved and given back home equity that perhaps they gambled on in the first place. The cost, NCRC estimates, $50-$100 billion.

NCRC also has a Harvard Law Professor on its side, arguing the case for eminent domain. The sticky part is proving that a mortgage is in fact a piece of real estate, but I’ll leave that to the scholars out there. Essentially it’s a way to force lenders/servicers into submission.

It’s another program that falls squarely on the side of the borrower, assuming that all the losses should go to the lender/investor, not to mention the U.S. taxpayer. Borrowers get a new loan and home equity to boot. Like I say, if that’s your preference, it’s not a bad idea. You know me, I’d like to see a little "equity" in all this debate over home equity.

Questions?  Comments?