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Thursday, May 01, 2008

Getting Into HOP Water I

I have been reading and running a few scenarios on the Blair Bank Search For A Way To Keep In Business (FDIC's latest mortgage bailout plan). Here's a short article describing it. Here's Tanta's first post on the topic. Here's the link to the FDIC's blurb about it.

I agree with Tanta that this is not very attractive to most. It might, however, be of use to banks that find themselves capital short right now and holding a bunch of yuck. There are quite a few out there!

I'll write more on this later when I've finished my scenarios. There are two problems that are quite obvious. The first is that the first lienholder becomes the second lienholder - behind the Treasury loan. So, as Tanta lays out, the first lienholder's collateral stake is reduced. The second is that the front end ratio of 35% is still too high for most homeowners. It appears very unlikely that most of them will succeed when you add in their other debt to get a back end ratio. Really all of the trouble we are seeing is that the old norm was a front end of 28% and a back end of 36%.

So many of these homeowner will eventually sell or default and go through foreclosure. Tell me who benefits? Not the homeowner - they are just stuck in the house they are going to lose for longer. Not the first lienholder, unless the first lienholder needs the Treasury payment to stay alive. As for the second lienholder!! I find absolutely incredible that a second lienholder would agree to go to third place unless they are already dead. Therefore most of these transactions would be done for loans which are pretty close to workout already. If they are close to workout already, why not just write them down, adjust the interest, and keep one's collateral?

So basically the banks get some working capital up front now in exchange for losses later. But that could be of use to some organizations, and it may be the real agenda behind this plan. Otherwise I cannot see what its purpose really is.

There is an easy litmus test:

Does the action delay and/or push into the future a reckoning?
It does!
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