MBS- FNMA 4.5 price: 100-14

10-yr Treasury Yield: 3.83%

Here is a well-framed portrait of how ineffective the mortgage modification program has been.  I still remember the “cramdown” bill (that didn’t pass).  We wouldn’t be seeing this story had the cramdown passed, I believe. 

As of Oct. 31, only 4.7 percent of the modifications that had been on the books for at least three months had become permanent, according to the Congressional Oversight Panel.

While that doesn’t mean that more than 95 percent of trial modifications begun three months or more earlier “are failures,” in the panel’s words, it does mean that the “vast majority” of trial modifications failed to convert on the schedule that the Treasury originally announced.

Treasury’s Barr said that mortgage servicers — some them stand-alone companies, others units of big Wall Street banks — simply aren’t doing enough to move homeowners from trial to permanent modifications.  Link to article…

I think it’s wise to also consider the opposing point of view on the cramdown option.  Predictably, this Investor’s Business Daily article is opposed to the idea, arguing that it would be a “body blow” to real estate sales and to lending rates.  That’s a perfectly credible argument and it is probably true that the effect would raise rates— since the lure of mortgage-backed securities would lose some of its shimmer to hungry investors.  I found it comical how the negative effect on the HAMP program was cited as one reason why cramdown should not be made law.  (This is the very program that has managed to modify only 30,000 or so out of over 700,000 applications thus far.  That’s less than 5%, folks.)  

So here is my argument:  servicers and lenders have NO INCENTIVE TO MODIFY MORTGAGES.  So they don’t.  That’s the bottom line.  The HAMP program has no teeth, and this is exactly what the cramdown legislation could have provided: teeth.  Lenders would be subject to a bankruptcy judge’s authority and would have to comply with the ruling if the judge determined that a reasonable option for saving someone’s home was possible, but had not been made available.  It’s actually a very reasonable policy in my opinion that makes it at least possible for a homeowner to MAKE A PLEA TO SOMEONE OTHER THAN THEIR OWN LENDER OR SERVICING COMPANY— an entity that, incidentally, doesn’t typically give a crap that your home is your home and has been part of your family for generations, etc.  But a judge, especially after hearing the story from the homeowner of how much effort most homeowners undertake to obtain modifications, and how lenders have stalled, and not returned phone calls, and have lost documentation, and have demanded a perpetually unending list of conditions, and who generally aren’t getting it done… hmmmmm… well, I just wonder on whose side that judge is going to come down? 

In the Investor’s Business Daily article, a commentor said his lender friends were “in a panic” when the legislation passed the House last March.  That should be music to our ears considering the bailout the banking industry has received. 

How about a public option for lending?  One that negotiates a short refinance for the millions of upside down homes in this country?   How about something WITH SOME TEETH?  Something like that already exists…  

FHA enables a short refinance program… if you’re willing to battle your lender to agree to a short pay off and endure the blow to your credit for settling the account for less than owed.  But, considering the dismal effectiveness of mortgage modifications a short refinance actually has some promise.  And unlike with an application for a modification, the homeowner actually has some leverage in the form of a new lender with what is essentially an offer of take it or leave it.  More music to my ears! 

So, since the concept of a cramdown is not gathering the support it needs to succeed I believe the solution is now in the realm of short refinancing and short selling.   It’s still a battle, but so is everything with regard to home finance right now.  Keep your heads up folks and keep fighting for your homes!  It truly is fighting the good fight.