Financial Stability Plan Details

The details of Obama's Financial Stability Plan are officially out, but there are still unanswered questions. The official website is up with the specifics of the two plans, one for high loan-to-value refinances for good borrowers and the other providing modifications for borrowers in danger of losing their homes.

The basic idea is to first find out if you are eligible by following the steps on the website, next call your loan servicer, and then be patient. The servicers are no doubt being inundated with more requests than they have the ability to deal with.

You'll need patience since it sounds like even the refinancing part of the plan is to be run through the servicers. Typically servicing loans, i.e. opening envelopes and posting payments, is a completely separate operation from originating loans, i.e. evaluating income, assets, credit and appraisals. Many lenders specialize in one or the other function while a few of the big ones do both.

Those large lenders who do both are going to be overwhelmed with applications, and it wouldn't surprise me to see refinances taking two or three months to complete. Interest rates are low right now, but they're also volatile. Hopefully borrowers won't start the process with rates in the 4%s and end up in the high 5%s because it takes so long. A much more efficient way to do these refinances would be to offer this program through all Fannie/Freddie lenders and let the existing force of loan officers and underwriters close the loans.

The other thing that is still not clear in all this is the pricing. Politicians who are far removed from the real world can say things like "market rate" without really understanding what that means. In today's mortgage market there is no such thing as a single rate on any given day. Most important is the fact that rates are partially based on loan-to-value, and there is no pricing for a 105% loan. In fact, the rate often gets better just over 80% LTV because the presence of mortgage insurance decreases the risk to the lender. Will there be MI on these refinances? We still don't know, and these are the details that determine whether the program will be a success.

On the modification side, the only question I still have is how to get the investors to go along. One thing that will help is the passage in congress of the mortgage bill allowing bankruptcy judges to modify loans. Hopefully it won't come to that, but having that "stick" to go along with the financial "carrot" already announced should help motivate lenders to play ball.

The difficulty is knowing who really owns these loans after they've been converted, shuffled and repackaged. A recent Time Magazine article gives a great glimpse into the complexities of mortgage bonds and CDOs. Anyone wanting to understand the challenges to loan modification and how a relatively small number of foreclosures can wreak so much havoc in the financial world should take a moment to read this story.

Even with the poor performance of modifications to date, with as many as 59% already being back in default, it still remains the best option we have for troubled mortgages. This new plan's success rate should be better since it includes debt-to-income guidelines that should work for most families. People who really can't afford their mortgage at any interest rate will not be able to modify. Even if the success rate is the same, stopping 41% of the foreclosures is a lot better than doing nothing and should have a positive effect on the housing market.