Toxic Mortgages See Silver Bullet in Financial Crisis

As the financial crisis hurriedly becomes the primary burden of President Barack Obama, the new Administration will need to intensify their efforts in order to address the ever-rising tide of home foreclosures in order to get to the root cause of this difficulty. Last February 11, Timothy Geithner, acting Treasury Secretary along with Shaun Donovan who is the Secretary of the Housing and Urban Development Department had met with some community groups as well as some key stakeholders. These people are part of the banking industry and work to gauge the support they could get for a potential program that can allow the government to buy whole loans from the servicers of the mortgage-backed securities (or MBS). They want this for modification purposes as well as keeping more borrowers of homes.

One of Several Plans

This move is simply one of the sets of proposals which the Obama Administration has been considering as it is trying to figure out how foreclosures can be stopped amid the deepening recession. There are also a lot of foreclosure filings on two hundred seventy four thousand and three hundred ninety nine United States properties last January. This was down to ten percent from the previous month but around eighteen percent higher compared to a year ago. This was according to RealtyTrac, a premiere foreclosure research firm. Last December, the company Mortgage Bankers Association mentioned that there was one in every ten United States families that have a mortgage could be in arrears or are in the process of having their house repossessed.

Insufficient Attention to Homeowners

A lot of banks and mortgage servicers have been busy with loan modifications while under a Federal Deposit Insurance Corporation program. This has been in effect ever since the first quarter of 2008 – however, a lot have not been able to benefit from this cookie-cutter approach which has paid very little attention to the varied financial conditions of the individual homeowners. There are also some mods which have not been addressing the need for some wholesale cleaning out. There are a lot of toxic loans which were collected in via securitized pools and then sold by piecemeal to a lot of investors.

The problem that is explicit here is that there is virtually no flexibility when it comes to modifying the different terms of the individual mortgages thanks to the Pooling and Servicing Agreements (or the PSA) which govern the mortgage pools. The key to this, according to Geithner and Donovan (along with the president of NCRC John Taylor) is to put loan modifications on a larger scale through the Homeowners Emergency Loan Program. Doing so will allow the Treasury the right to purchase the distressed loans at big discounts and will still be equivalent to the current value in the market.