Here's a Simple, Market-Based Plan to Fight Foreclosures
The Obama administration, facing pressure to do more to help homeowners avoid foreclosure, may be sitting on a solution it doesn't even know it has.
The White House last year received a proposal for a Web-based mortgage modification system that on paper eliminates many of the problems hampering the government's ineffectual Home Affordable Modification Program. Part LendingTree and part eBay, the "Mortgage Crisis Solution Program" essentially sets up an online market for troubled mortgages that links the three main parties involved in such loans -- borrowers, lenders and investors.
New York attorney Ira Hecht, one of the system's developers, says in an interview that the program would let homeowners quickly, and anonymously, apply for a loan modification and get a response within minutes.
Here's how the program works:
1. Banks, loan servicers and other mortgage holders enter data on their distressed loans into a Web site.
2. Homeowners, assisted by a registered "advocate," enter their loan and other banking information into the site and "bid" the monthly mortgage payment they wish to pay.
3. The system automatically matches homeowners with mortgage holders that might be interested in meeting their proposed loan terms, sending an email to both parties with the relevant contact information.
4. Institutional investors then enter the auction by bidding on which renegotiated loans they want to invest in. Winning bidders don't purchase the loans, but rather are issued a government-insured security called a "home certificate."
5. The investor transfers funds for the home certificate through the Federal Reserve system, and the program makes a payment for the value of the loan to the mortgage holder.
6. Once the deal closes, homeowners make their monthly mortgage payment over the Web site. The system divides the payment and allocates it accordingly to the investor, mortgage servicer and government insurance fund.
In principle, the system offers some clear advantages over HAMP. For one thing, it seems to provide a stronger financial incentive for lenders to modify mortgages by connecting them with private investors willing to take toxic loans off their hands. Private, not public capital, is being used to fully or partially pay off distressed mortgages. Such market forces are typically more effective than a push in the back from the feds.
The program also would establish a self-funded insurance program, akin to the guarantees provided by the Small Business Administration, to limit potential losses from loans blowing up even after they're renegotiated. That's good for taxpayers, who of course pay for HAMP.
In reviewing Hecht's program last year, New York University economics professor Andrew Caplin said in a paper that it offers "excellent incentive properties, and can be organized so as to be of low cost to taxpayers." Especially appealing, in his view, is that participation is voluntary, although he favors tweaking the system so it shares more of the risk with investors and the government.
Caplin also said the program allows homeowners to renegotiate their mortgages before they're in imminent danger of defaulting. "This is critical to containing the cost to the federal government, and also will help to more quickly resolve the problems that are still building in the market associated with future defaults," he wrote.
Another benefit -- and this is key -- is that borrowers, mortgage holder and investors participating in the auction all share in whatever value is recovered on the distressed amount of the mortgage. HAMP doesn't do that.
Finally, the program appears to eliminate one of the major impediments to modifying mortgages -- a home's former market value. Lenders don't want to alter people's loans because, as real estate prices continue to fall, they lose money on the deal. The Mortgage Crisis Program tries to get around that through its use of the auction and Home Certificate security, which in theory could help mortgage holders recoup more of the value on a bad loan.
Yet if the program look ingenious in creating a new way to finance crummy mortgages, it faces other problems -- competition and politics. A range of large financial firms, including government-backed entities like Fannie and Freddie, have a stake in keeping the dysfunctional housing finance market exactly as it is and might not welcome new competition. Those parties are obviously well-connected in Washington, which would have to get behind Hecht's idea for it to succeed. The White House is also politically invested in HAMP and is doing all it can to paint the program as a success.
Hecht, who formerly led the Internet technology practice at law firm McGuireWoods, admits he hasn't gotten very far in attracting the government's interest. He and a partner sent a proposal to the White House last spring. It went nowhere. Separately, they presented their ideas to congressional staffers. Some of them expressed interest, he says.
"We believe we have something that the government could use," Hecht says, noting that his program would work for FHA and other federal loans. "Government programs benefit some of the people that created the housing mess."
Hecht also says the technology behind the system is ready to go and that the program is "shovel-ready." Are the feds ready to start digging?