Friday, October 30, 2009

Must Mortgages be Modified According to Treasury or FDIC formulas?

Mortgages held by Freddie and Fannie must. So do mortgages held by banks taken over by the FDIC. It appears that Citi agreed to follow the FDIC guidelines with its mortgages as part of the terms of its November 2008 bailout.

For those that are left, participation is voluntary. But we cannot conclude that voluntary participation is equivalent to an endorsement of the FDIC guidelines, because servicers may follow those guidelines merely to partake in the significant Treasury subsidy that goes along with following those guidelines. Treasury has budgeted $75 billion for the HAMP program, which it expects to reach 3-4 million mortgages. That's more than $20,000 of subsidy per mortgage!

The table below summarizes reports by Treasury, FDIC, and the Congressional Oversight Panel as to the type and amount of various subsidies. This list is not exhaustive, but I think the largest part of the subsidy is that Treasury pays half of the amount of a borrower's mortgage payment that causes it to be 38% percent of that borrower's income rather than 31%. For example, if borrower annual income was $50K and unmodified annual housing payments were were $20K, the Treasury would in effect be paying $1,750 per year for five years toward the borrower's mortgage.

1 comment:

Ilmusains said...

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