Billionaire financier Wilbur Ross has long called for a comprehensive plan for unwinding the mortgage mess, and he’d like one that allows private investors such as himself to get in and help — exactly what President Barack Obama and Treasury Secretary Tim Geithner claim is their goal.
But the plan announced this week, Ross writes in his column in The New York Post, falls short in a number of ways.
On the bright side, the terms do offer reasonable borrowers with income a chance to stay in their homes. Government and private sources will help cut the cost down to 31 percent of income, for instance.
That’s all good, but “the plan seems needlessly complex. It sets out only to cut monthly payments to affordable levels — assuming that borrowers will then continue to pay even on mortgages that exceed the home's value,” Ross says. “This is at best debatable.”
A better approach would have been to get the government and bank to share 50-50 the cost of reducing the principal to the home’s current value.
Such a plan would have given homeowners an incentive to stay in their houses in order to rebuild equity, Ross maintains.
Part of the problem, too, with the Obama plan is that it presumes that all home mortgage borrowers can be saved.
In practice, however, redefaults — where the borrower simply stops paying the new, negotiated mortgage — are a severe problem.
ResCap CEO Thomas Marano says his company, the fifth-largest U.S. mortgage servicer, has seen redefault rates hit 50 percent six months after a mortgage is adjusted.
"A lot of borrowers, once they go out and get their loan modification, they go out and load up on debt," Marano told Reuters.
"Borrowers must learn that when they get a mod, it's not just about getting their payment down, they need to get their budget in order."
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