Mortgage aid plan benefits all sides
Homeowner refinancing could help banks in long run
NEW YORK – Congress’ plan to allow people to refinance into more affordable mortgages won’t just relieve thousands of homeowners – it’s also expected to save the banks who issued the loans billions of dollars.
Most banks will end up losing much less money handing mortgages over to the government than they would if the loans defaulted and the homes went into foreclosure. Plus, it will be up to the bank to decide whether to allow the homeowner to refinance.
“The banks should be thrilled with this,” said John Vogel, professor of real estate at Dartmouth College’s Tuck School of Business. “The banks have been pushing it; this is as good a deal as they were going to get.”
The legislation, which the Senate approved during a rare Saturday session and which President Bush is expected to sign into law, is expected to affect at least 400,000 homeowners. It comes after several months of discussions between lawmakers and lenders; banks including Credit Suisse and Bank of America Corp. submitted proposals.
Banks and other mortgage holders will likely save some $16 billion if they let homeowners refinance into mortgages issued by the Federal Housing Administration, estimated Ladenburg Thalmann analyst Richard Bove. That’s assuming that banks will lose roughly $25,000 per homeowner by selling their mortgages to the FHA, and that they would eventually lose about $64,000 per homeowner, on average, by allowing homes to foreclose.
“I don’t think it helps the banks in the near term, but I think it’s an enormous boost in the long term,” Bove said.
The government’s decision to set aside $4 billion for communities slammed by foreclosures should also help to stabilize tumbling home prices, experts say.
If banks and mortgage servicers decide they don’t want to allow their borrowers to get FHA loans, they don’t have to. If a bank wants to keep its customers, it can let them refinance within the bank as an alternative to turning the mortgages over to the FHA.
But the rule could also mean that banks, hoping to avoid immediate losses, won’t offer relief to as many homeowners as the government intends to, according to Tuck’s Vogel – he said the 400,000 figure “might be optimistic.” And if homeowners don’t think their banks will allow them to refinance into FHA loans, they might still decide to send in their keys and walk away from their loans, Vogel said.