A few days ago the Treasury Department announced their unlimited support for the two GSE’s, Fannie Mae and Freddie Mac. Many speculate sticking this potential bombshell of a story in the holiday news cycle was intentional leading to even more sinister assumptions.

The most ‘horrible’ rumor circling the banking industry is Obama wants to give foreclosure victims real help by making some big changes to the Home Affordable Modification Program (HAMP). The changes the President wants to make will costs a ton of money to the GSE’s, hence the change in support for them.

Here’s how the rumor goes..

1.) Economists estimate the cost of giving every underwater homeowner a 5% equity stake in their home at $858 billion.

2.) Most of these underwater loans we (the US Treasury Department) are already on the hook for since they are insured by the GSE’s which has been owned by the government since the takeover last year.

3.) The way we turn underwater loans into those with 5% equity is through a loan modification process which includes reducing the principal balances on millions of loans. On an average underwater loan it would mean forgiving about $70,000 of principal. Fannie or Freddie would eat this loss…or should I say pass it on to the government since now they have committed to unlimited support.

If this is going to be the next “New” Obama Plan to help foreclosure victims…quite frankly I don’t think it’s half bad. God knows the plans that have come prior are simply not working.

I’m sure this one would…and here’s why…

Everyone knows folks don’t walk away from equity even if it’s only 5%. Everyone also knows it is about time to spend to real money and get some real results from HAMP…and these changes would do it.

Okay so we have to spend another $800 billion like we did for the banks with TARP, but since TARP is getting paid back with interest, we have the money. Plus I don’t think the cost of NOT doing this has been calculated. The shadow market of growing REO holdings at the nation’s banks (houses that are soon getting put back on the market) could wreak havoc on the weak but recovery housing market if allowed to grow.

It is conceivable that Obama is attempting to avoid a “double-dip” recession if this is indeed his plan. He may be smarter than we think.

Nothing puts the country back in the doldrums like a sluggish housing market. And nothing creates a sluggish housing market any faster than an over-supply of millions foreclosure homes getting put back on the market all at the same time.

This rumor…if true…would be the single smartest thing Obama has done. Not only that, but he’d guarantee himself approximately 10.7 million votes in 2012 from those home owners currently underwater!

Ha!

Good Luck!

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