Structural Problem In Mortgage Land

All we have heard over the last 6 months is how the government and banks have tried to stem the tide of foreclosures. How they have restructured many sub prime mortgages, lowered interest rates, Yada Yada Yada.

The Obama Administration has thus thrown billions of dollars at the crisis, with programmes to modify troubled mortgages and others to help homeowners refinance into new loans even if their homes are worth less than they owe.

But as the economy deteriorates and job losses mount, more and more prime borrowers will be pushed into trouble.

In general, loan-modification programmes have been designed to modify subprime adjustable rate mortgages or tackle interest rate resets for other exotic home loans, but the growth in problem loans is now migrating to prime borrowers and ordinary loans with 30-year terms and fixed interest rates. The rate of late payment on prime loans jumped 72 basis points to 5.06 per cent in the fourth quarter of last year, according to the MBA, while prime loans in foreclosure rose 30bps to 1.88 per cent. These are much more difficult situations to modify, because the problem is not the structure of the mortgage. The borrower is falling behind because of a job loss and too much debt.

I do remember the good old days when banks actually owned mortgages, when they actually had loan standards, but now mortgages are securitized, which in turn makes loan modifications very difficult. The problem is that loan modifications only work if the principal balances are modified, and even after that how are people going to pay their mortgages with no job?

Does the Obama Administration have a program for these people?