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Thursday, April 12, 2007

Washington Post: Bailout Update

by Tanta on 4/12/2007 09:46:00 AM

As is all too typical, the Post serves up a nice issue salad today on foreclosures, loss mitigation, and bailouts. It takes a fair amount of effort to untoss the thing and figure out what information you might want that you didn't get. The title of the piece, "$1 Billion Pledged to Help Fend Off Foreclosures," appears to refer to existing commitments by banks--Citi and Bank of America--to Neighborhood Assistance Corporation of America. The funds were originally earmarked for low-to-moderate income borrower purchase loans, but have been reallocated to refinancing troubled mortgages currently held by subprime lenders. This issue is happily tossed with potential federal bailout legislation in the works:

Sen. Charles E. Schumer (D-N.Y.), the committee's chairman, plans to propose legislation that would provide "hundreds of millions of dollars, maybe more," in federal money to help borrowers avoid foreclosure by refinancing mortgages they cannot afford.

That money should reach borrowers primarily through community nonprofit groups that are already helping homeowners refinance burdensome mortgages, Schumer said. But he has not worked out the details of whether banks and other groups would be conduits for the aid or where the money would come from. Schumer has said it might come from a federal appropriation or perhaps the Federal Housing Administration or mortgage financiers Fannie Mae and Freddie Mac.

NACA, the housing advocacy group, applauded the proposal, saying it has a better track record of keeping people in their homes than subprime lenders, whom it characterized as predators that mislead borrowers into taking on loans they cannot repay. NACA requires that people who ask for its help attend intensive housing counseling workshops. It also assesses the person's ability to own and maintain a home. It then helps the person obtain a mortgage with one of its partner lending institutions, the biggest ones being CitiGroup and Bank of America. In 2003, Citigroup made available $3 billion in mortgage loans to NACA through 2013. Bank of America, which has worked with NACA since 1995, committed at least $6 billion through 2015.

The group traditionally found the money was best used to finance new home loans for low- and moderate-income buyers. But with the mortgage crisis unfolding, it decided that $1 billion should be used to refinance the loans of people preyed upon by abusive lenders. The group expects to refinance about 7,000 mortgages -- a small number, given estimates that more than 1 million homeowners nationwide could be at risk of foreclosure.

If the "proposal" being "applauded" here by NACA is that any rescue funds should be administered by community-based nonprofits like NACA with a track record of decent performance on its own purchase-money mortgages, then I'd have to agree it's probably a wise idea, even if I'm not ready to start clapping. If this is going to be another one of those "faith-based initiatives," I consider that we've already been fleeced enough there.

The rest of this proposal is, of course, another story. It's not that I object to Citi or BoA committing loan dollars here, but there's something about them being "conduits" for such funds that does things to my eyebrows. Taxpayers, beware of "conduits."

But of course, the question of what Citi or BoA is actually committing to fund here is left unanswered. Here are the questions I have (hint, reporters, hint):

  • Are the 7,000 or so loans NACA wants to work out with a subsidized refinance originally purchase loans? In other words, is the current unaffordable mortgage a result of "ownership society" push to make home purchase money funds available to subprime buyers, or is this an effect of homeowners using the subprime lending market to extract equity?
  • The above item might matter if we addressed the question of who, actually, holds the loans being refinanced. Aside from the question of which homeowners are being bailed out, we have the question of which lenders are being bailed out by having a nonperforming loan taken off their books. Are we clear that Citi and BoA are not holders of the existing notes?
  • If NACA is using these funds to refinance loans that were originally made at predatory terms--predatory lending being not the same thing as subprime lending, necessarily--what is the provision for penalizing the originator or holder of the current loan? Is Citi or BoA paying "the fine" here for illegal lending practices, by providing the funds to refinance the loans?
  • Is there really no money at all left to be wrung out of the subprime lenders, such that we're now ready to talk about the taxpayers stepping in? How could that be?
  • Is Schumer's "hundreds of millions or more" a question of capital to make refinance loans with? A subsidy on the interest rate of such loans? A cash transfer to the original lender in the form of debt forgiveness on the loan being refinanced? Additional credit enhancement (i.e., a subsidy of insurance premiums) to make the refinanced loans investment quality? An additional guarantee to the refinancing lender? Is there, in other words, any potential return to the taxpayers? Do I get a lien? Am I now a bondholder? Or am I, the taxpayer, just covering the losses?