The Treasury Department begins its mortgage meltdown makeover.
It looks like help is finally on the way for anxious homeowners. The Treasury Department stroke a deal that would alleviate the long wait for those troubled with their mortgages. But not everyone can rejoice yet. The newest plan will only cover those with conforming mortgage under Fannie Mae and Freddie Mac and not the millions who are saddled with subprime loans from mortgage companies. According to The New York Times, only a hundred thousand homeowners who are 90 days behind their payments will benefit from the plan so no major changes in the property market must be expected immediately.
Those covered by the program obtained mortgages that strictly hold on to the rules set by the two government sponsored enterprises (GSEs). The low rate of each loan reflects its GSE guarantee so it’s also risk-free to buyers on Wall Street. These are sold as mortgage-backed bonds after they are repackaged. The subprime mortgage crisis brought down the entire economy so these bonds assured by confirming mortgages lost their value as no one wanted to buy such in an unstable market.
The Treasury Department has given first priority to the GSEs since the loans issued are more manageable than the higher-risk subprime loans. We assume then that the government would have to clean its own mess by testing the waters on these mortgages first before dealing with the bigger headache in the subprime market. Though the reception from borrowers is still unexpected based on previous participation from other programs (think: Hope for Homeowners plan), the program must be more marketable and favorable this time to homeowners who wish to reclaim their investment. After which, the government can think of introducing a mortgage bail out strategy to subprime loan holders to get the ball rolling.
This is a commendable start in a series of solutions for the ailing economy. But, concerns do exist and you have to start thinking about those home owners who don’t qualify for these GSE programs. Will the US taxpayer eventually be paying for mortgage mark downs? The money has to come from somewhere.