Principal writedowns of the day, mortgage edition: It’s principal-writedown day today! Jesse Eisinger has uncovered a huge story: that internal analyses at both Fannie Mae and Freddie Mac show that reducing principal on troubled mortgages has a “positive net present value”. That of course directly contradicts the testimony of Frannie’s regulator, Ed DeMarco — but it’s now going to be much harder for DeMarco to maintain his position that principal reductions would never help Frannie’s finances.
Meanwhile, Bank of America has launched a pilot scheme which is a variation on the theme of principal reduction…. [B]anks don’t want to foreclose: prices are still very depressed, making homes extremely hard to sell…. Banks have no particular interest in being landlords, but if they can do right-to-rent deals with a large number of homeowners, they can bundle those deals up into a big package, and sell it off to investors…. The WSJ explains how the BofA scheme works:
Borrowers would agree to a what is known as a “deed-in-lieu” of foreclosure, where they essentially sign over ownership of the property to the lender. This is less costly to the bank and also does less damage to a borrower’s credit than a foreclosure.
In exchange, former owners would be offered one-year leases with options to renew…. [I]n Phoenix recently, a consumer with a $250,000 mortgage and monthly payments of $1,600 could swap the house for a lease, renting the home for $900, depending on the condition of the property and the neighborhood….
This is a far cry from a right to rent a home that has been foreclosed, of course. All of these self-imposed rules seem silly to me…. The real reason for this pilot scheme, I suspect, is just that BofA is very worried about its legal ability to foreclose on houses. The difference between a foreclosure and a deed-in-lieu operation like this one is that a foreclosure is involuntary on the part of the homeowner, who retains lots of legal rights. A deed-in-lieu, by contrast, is something the homeowner must agree to…. [L]et’s hope that the pilot works, and is copied by other banks around the country. It’s about time.