Obama’s New Housing Program Is a Huge Gift to Banks

Dean Baker does a great job
of explaining what it will do. And, while Baker does imply that the
Administration may have been a bit naive in structuring the program
this way, I doubt it. Further, you can be sure that Lloyd Blankfein and
Jamie Dimon understand exactly what this structure means. Here’s Baker:

 The latest Obama administration initiative aimed at easing the
nation’s foreclosure crisis may be well-intentioned, but fails to give
proper consideration to the state of the housing market. The biggest
winners are likely once again to be the banks. In particular, holders
of second mortgages are likely to see this program as a huge bonanza.

The program provides a substantial incentive for holders of first
mortgages to reduce principal by having the Federal Housing Authority
(FHA) guarantee a new loan at 97.75 percent of the current market
value. In many cases this would be far more than the holder of the
first mortgage would collect if the loan went through a foreclosure
process. However, the payment on the second mortgage would be
unaffected.

By substantially reducing the required payment on the first mortgage,
the program will be creating a situation in which the second mortgage
— which would be worth little or nothing in foreclosure — will
suddenly again hold considerable value. This will be a huge windfall
for second mortgage holders. It is worth noting that the major banks
have vast portfolios of second mortgages.

This has the distinct odor of inside bankers all over it.

In every mortgage book ever written, first mortgages are paid off in
full before second mortgage holders see a penny. In this structure, the
firsts are written down to the benefit of the seconds. One has to ask,
"What prompted the bankers to go out and buy these seconds at pennies
on the dollar, in the first place, that will now rocket in value?"

Posted by Robert Wenzel at 3:05 AM 

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