THE HARDEST HIT FUND – TAXPAYER CASH FOR PRINCIPAL WRITE-DOWNS

In its efforts to stop the proverbial plane from nose-diving into the ocean, the Obama administration back in February of last year put forth the Hardest Hit Fund (“HHF”), a $1.5 billion taxpayer backed initiative to allow state housing authorities to come up with “innovative measures” to help homeowners in the most hardest hit states. First in line were California, Florida, Arizona, Michigan and Nevada.

 Now it appears that Wells Fargo is looking to help out Arizona underwater homeowners by using some of the HHF money to provide for principal reductions. In an announcement that it is in talks with the Arizona Department of Housing to join a program of principal reduction, Wells Fargo now joins the ranks of Bank of America in providing principal reductions to delinquent homeowners in Arizona.

This is good news for investors! Simply put, if it is structured in a way that allows the HHF money to off-set the principal reduction, the investor is made whole for the write-down. HOWEVER, if the servicer looks to capture some of that money for expenses and deferred costs, the investors will be getting less than their full reimbursement. It is up to the state housing authorities to hold the line for investors, and not the servicers.



At stake as well is the reimbursement for advances that the servicers most probably will attempt to recoup from the HHF moneys. Now, while the servicers should be entitled to any reimbursement of advances that are specifically tied to principal advances, it is questionable if reimbursement of interest advances should be permitted. The counter-argument, however, is that any interest advances not reimbursed would then most likely be added to principal (either as a straight addition or as a deferred balloon payment) and would then constitute principal as well. Either way, the servicer would be left out in the cold for a while as it attempts to get back its advances.

 So, as the property values in Arizona remain as stagnant as the hot summer air in the desert, let’s hope that this program provides a bit of cooling to the burn that homeowners have been suffering. And although this may be more of a spray of water than a jump into a pool, for those of us that have been in Scottsdale in August know, even the mist makes a difference when you are otherwise baking in that Arizona sun.

“SEND THEM TO SCHOOL” – TREASURY'S NEW PROGRAM FOR THE MORBIDLY DEBT LADEN AMERICANS

In his remarks today at the CFED Asset Learning Conference, Assistant Secretary for Financial Institutions Michael Barr announced the Treasury Department’s newest attempt at rectifying the past mistakes of the financial consumer. In conjunction with the Financial Literacy and Education Commission, the Treasury has drafted a concept of core financial competencies for individuals. This ‘baseline’ of knowledge appears to be a way that the Treasury believes will bring financial consumers to a better understanding of what they are getting into.

While knowledge and education are a lofty goal, there has to be some understanding of the ability (or inability) of the financial consumer to be receptive to the program. The mistake of the past was that while a consumer was able to qualify for a loosely underwritten mortgage loan did not mean that such consumer should have been a homeowner. Pressure from the then current administration on down to the consumer’s desire to own a home, together with all the intermediaries (mortgage broker, appraiser, home builder, realtor, Wall Street banker/lawyer, etc.) drove the market into the wall with one huge “SPLAT.” Now, the Treasury believes that showing the consumer what he needs to know will somehow avoid this problem in the future.

One flaw with this concept is the fact that Wall Street, specifically the sub-prime mortgage market for which we have to thank as a significant contributor to the current financial hole we are in, will never want an educated consumer. It is the theory of “Caveat Emptor” or "Let the buyer beware" that fueled the current crisis and allowed those in the game to make vast amounts of money. Feeding these consumers easy credit allowed all involved to run this vast financial machine. Educating the consumer will not bring profits. To show the consumer what was being done would be like showing a person what it actually takes to turn a cow into a hamburger. And how many people really want to know what was in their McLoan or how it was made. Most of these lower income financial consumers (the sub-prime borrower) want something that is easy to swallow, tastes good and is cheap. Unfortunately, they are now experiencing the indigestion that comes from consuming so much “Fast Finance.”

Yet, Mr. Barr believes that Treasury, with the establishment of the Consumer Financial Protection Bureau, can become the home economics trainer of the debt overweight consumer. By putting the unbanked and underbanked consumer (again, the sub-prime borrower) on a “dollar watchers diet” and educating them on how to fiscally shape-up, Mr. Barr stated that this will empower American families and create a level playing field for all providers of consumer financial products and services. “We need to empower consumers to make good choices for themselves and their families. We need to recognize that inertia is a powerful part of human decision. Anything that we can do to create an automated aspect to savings decisions has a lasting impact. How choices are framed and ordered can also have big impacts, which requires us to be intentional about the architecture of choice; defaults are ubiquitous and powerful, so choose the default wisely, and people view gain and loss differently, so an assurance of safety can be an attractive draw to save. These are just a few of the lessons that behavioral economics has taught us about human behavior. These and other lessons should be considered wisely to access and asset building efforts.”

But like a gym membership, it only has an effect on those people that commit to the program for a consistent period of time. However, the financial consumers discussed by Mr. Barr were not the type to educate themselves before entering into significant financial arrangements. They just wanted their McLoan - supersized. Now, they are looking for the magic pill (HAMP) to get them “debt thin” again. But like the promises of so many of those diet pills, loan modifications or debt settlements appear to only work for a limited few. So, while this new education program may work to help a few of the morbidly financial obese that commit to the program, it probably will be like the treadmill in the corner of the basement and will not get most of these borrowers off the couch and stop them from eating “credit Cheetos”, once the shelves are restocked.