While I am still not thrilled with the 300 billion dollar housing bill working it’s way through Congress, they did insert some logic into the process. The bill is designed to help out the lenders and homeowners that are underwater on their loans.
But the reality is that most of these loans were financed 80–20, or 90–10, nobody wrote 100 percent loans to these folks. So even if the bailout was in effect, there was no incentive for the 2nd lien holders to make a deal. Why would they being willing to give up any chance of recovery just to make Congress look good?
So someone woke up and added the clause that in exchange for releasing the loans, they could recover some of the homes appreciation when it sells in the future.
I am not so sure whether this will make a huge difference but at least the lenders will have a dog in the fight instead of being shoved aside. My only concern is that knowing how Congress works they will slide an amendment in the future that will waive any agreement for participation in future profits for 2nd lienholders to buy votes in the future.
As someone who trust politicians less than I do convicted felons, this is a rational way to look at their actions.
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 by allowing second lien holders to share in future price appreciation, even as their existing lien is extinguished via the refinancing transaction. via the Housing Wire.
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Who is set up to monitor these reconstructed loans, to see how many wind up back in foreclosure in less than 2 years. I am guessing 50% will be back in foreclosure, and then FHA, will be covered up with 250,000 and up homes sold as HUD foreclosures, which are usually 30% below the market of what the independent banks and lenders resale their foreclosures in any given neighborhood, thereby causing another downturn. Do you think anyone is going to monitor this?