Tags: Brookings | Mortgage | Break | loan

Brookings: Just 5 Percent Might Qualify for Mortgage Break

Monday, 05 March 2012 11:53 AM

The massive, $25 billion settlement over mortgage fraud between the banks and the government could end up helping just 5 percent of borrowers at risk and offset less than a third of their debt problem, according to new research from the Brookings Institution.

Breaking down the data, Brookings found that an estimated 500,000 loans would qualify for the settlement and see principal relief of about $20,000 each.

“This would be a significant amount of principal reduction, but only about 30 percent of the average amount of underwater equity,” writers Brookings’ Co-Director of Economic Studies Ted Gayer on the think tank’s blog.

Editor's Note: Wall Street Whistleblower Warns of Meltdown, See His Uncensored Interview

Part of the reason is that, by definition, a buyer who qualifies must owe more than the house is worth, Gayer writes. Secondly, federally backed loans don't qualify. A borrower must be behind on payments or about to default. Finally, the borrower must live in the home.

Considering those obstacles, you end up with 1 million qualified borrowers out of 11.1 million underwater loans. But then you must add in the fact that many borrowers also have home-equity loans, Gayer writes.

Banks by contract must limit losses to investors, Gayer points out. “It is unlikely they can reduce principal on these loans without facing the ire (and possible lawsuits) from the investors,” he writes.

Mortgage rates continue to hover near generation lows. The average 30-year fixed loan fell to 3.9 percent last week, while a 15-year loan would cost 3.17 percent.

While low rates are helping, high unemployment is keeping borrowers on the sidelines at precisely the moment when they could lock in a cheaper long-term rate.

“Affordability has increased dramatically as a result of the decline in house prices and historically low interest rates on conventional mortgages,” Fed Chairman Ben Bernanke told Congress recently.

“Unfortunately, many potential buyers lacked the down payment and credit history required to qualify for loans. Others are reluctant to buy a house now because of concerns about their income, employment prospects and the future path of house prices.”

Editor's Note: Wall Street Whistleblower Warns of Meltdown, See His Uncensored Interview

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