Wednesday, April 30, 2008

Negative Equity or Affordable Payments

The Financial Times reports on a proposal today by Sheila Blair, the FDIC chief. Interestingly the proposal is to use a first lien position 5 year interest free government loan to offset the principal balance of the first mortgage.

In return for the reduced principal balance, lenders would agree to reduce payments in line with the borrower's income level.

At the heart of the issue is the question: Which is the more pressing issue that is fueling foreclosure: Negative equity or affordable payments?

I think Blair is on the right track to focus on payments. It is the combination of negative equity AND adjusting payments which presents an impossible situation to borrowers: they are unable to refinance due to the lack of equity, and cannot afford the new payment. Fix the payment problem, and people will stay in their homes.

The proposal by the OTS to enable an FHA refinance program for people with negative equity using negative equity certificates is probably more problematic, as it may prove difficult to get lien holder agreement, especially when their is more than one outstanding lien on the property.