Hope Now Deniallance: The Plan, Unpacked

by Alex Stenback on December 7, 2007

So The Plan’s details can be found over at the American Securitization Forum (PDF here).

Exactly as we expected: The Plan Captures a very small slice of Sub-Prime ARM borrowers for relief, and is front page news on every paper.

This obviously will be covered to death in the mainstream media, and a lot of the blog coverage will be inside baseball that only mortgage geeks will care to wade through.  That said, there are a couple of points worth understanding, even for the casual observer, that will help to illuminate the key underpinnings, and potential impact, of this plan.

First, who’s eligible? Who’s the thin slice? The requirements are a little obtuse, with FICO tests, Equity tests, and so on, but Felix Salmon has a nice three sentence summary:

If you have good credit and are current on your mortgage, you’re not eligible for the freeze. If you have bad credit and you are behind on your mortgage, you’re not eligible for the freeze. The only way that you can be eligible for the freeze is if you have bad credit and you’re current on your mortgage, and it will reset to a higher rate after January 1, and your mortgage servicer determines that you won’t be able to make your mortgage payments after they reset.

Further, in most cases, one needs to have less than 3% equity in their home to be eligible.

Which brings us to this, from Elizabeth Warren at Credit Slips, who points out that there is precious little incentive for those who are eligible to actually take the deal:

In a falling market, a huge proportion of subprime mortgages are now in the 125% LTV territory–"below water" in the foreclosure parlance.  The current "deal" will have homeowners paying off all the mortgage debt or facing foreclosure once again. 

Whether you think that homeowners ought to pay all of the debt or not, regardless of the value of the property, it doesn’t make much sense from a families’ point of view to do so.  Those who can, will walk away.

At some point, in some of the worst markets, it is going to become socially acceptable to just mail in the keys. You heard it here second (somebody else has said this, we’ve read it, but can’t recall who.)

And no post on major mortgage market news would be complete without Tanta, at Calculated Risk, who sheds some light on why the plan was so narrowly targeted: It is as much about limiting servicer risk, as helping strapped borrowers:

None of that is about figuring out whether the borrower "needs" or "deserves" to be helped. It is about figuring out whether the borrower has any realistic option of refinancing, given current contraints in the mortgage market and the [Home Price Appreciation ] outlook. That, in turn, is crucial because to modify a loan that could have refinanced opens up the servicer to liability for contract violations…

…I’d say the contracts were the part of this that got the most thorough protection. In my reading of this, giving a deal to a borrower almost seems incidental.

At the end of the day, "something" had to be done about the foreclosure problem, and due to the constraints of the market, the structure of this plan represents the only something that could be accomplished.  Will it help some homeowners keep their homes?  Yes.  Will it make a significant dent in the foreclosure problems, and turn the real estate market around?  No.

{ 2 comments… read them below or add one }

Sven Rattankratch December 7, 2007 at 10:56 am

“At some point, in some of the worst markets, it is going to become socially acceptable to just mail in the keys. You heard it here second (somebody else has said this, we’ve read it, but can’t recall who.)”

We must be in a good market; my servicer said that mailing in the keys wasn’t enough. They stipulated that I must also board the windows, pour antifreeze in the toilets, and leave the heat at 52 degrees and the walk unshoveled to remain in their good graces.

Duane December 7, 2007 at 3:05 pm

thanks for the tips, Sven. I have a couple under performing rental properties that would be served well by this plan.

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