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Monday, May 23, 2011 2:29 PM

Illinois Plans to Blow $100 Million in Troubled Mortgage Relief Pilot Program

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Given a budget deficit of $1.4 trillion, we cannot afford to waste $100 million on ridiculous mortgage relief programs. Yet that is what bureaucrats want to do with a "pilot program" in Illinois. Worse yet, the proposal is sure to expand to other states wasting billions more taxpayer money.

MarketWatch reports Illinois plan to cut mortgage debt is making waves

A pilot program close to getting off the ground in Illinois seeks to use $100 million in taxpayer dollars to help potentially thousands of troubled mortgage holders in the state who owe more than their homes are worth.

Backers of the program, which needs the approval of the U.S. Treasury Department to move forward, argue that it will stabilize neighborhoods, reduce foreclosures, help the economic recovery and ultimately cost taxpayers nothing. Opponents insist it will leave taxpayers on the hook and drive better-off homeowners to engage in so-called strategic default, leading to more foreclosures and less stability.

Mercy Housing is seeking to use the fund to initially buy as many as 3,000 mortgages from underwater borrowers. Proponents say the loans — which are on the verge of foreclosure — can be bought at such a major discount from banks that balances could be reduced to levels below what the homes in question are worth.

The effort comes as many expect the number of U.S. foreclosures to climb to between 8 million and 13 million by 2012. Last year, Illinois had the 9th-highest foreclosure rate, of which 2.87% of all housing units received a foreclosure notice, according to RealtyTrac data.

George Ostendorf, president of American Mortgage Capital Group, said the purchases of non-performing mortgages would be combined with counseling services to help borrowers budget for both their mortgage and non-mortgage debt.

Ostendorf envisions that in a scenario where a delinquent borrower owes $180,000 on a home, the fund could buy it for $90,000. In this example, the property is worth $150,000 — less than what the borrower owes — and the fund’s managers would cut the loan owed to $135,000 so the homeowner isn’t underwater anymore.

The fund would seek to sell the now-performing loan for $135,000 about two years or more after purchase, generating an approximate income of $40,500 after operating costs. That income could initially be reinvested in buying more problem underwater loans, but in later years the income would go back to make sure there are no costs to taxpayers from the program.
Heart of the Plan is Nonsense

The heart of this ridiculous plan is the idea that banks would sell a property worth $150,000 for $90,000 enabling the fund to get a huge return in two years and reinvest the money into buying more mortgages at bargain prices.

Excuse me for asking the obvious question but what makes these clowns think they can get something worth $150,000 for $90,000? The idea is complete silliness.

The second thing I want to point out is there are 3,572,679 seriously delinquent properties as per this nice table courtesy of Calculated Risk

For the sake of argument, let's assume each state saved 3,000 mortgages. That would be 150,000 out of a pool of seriously delinquent 3,572,679 loans. Bear in mind that is seriously delinquent, not simply delinquent.

Even if the plan saved 3,000 homes per state, it would not be worth spending $100 million to do it. Worse yet, if the bureaucrats start such a scheme, it is all but certain to quickly expand from $100 million to billions.

Then two years down the road when the fund goes to sell those mortgages there will not be a dime of profit, only losses and another huge waste of time and money.

I have a question for George Ostendorf, president of American Mortgage Capital Group.

Hey buddy, if you think someone can purchase mortgages worth $150,000 for $90,000, turning a huge profit in a mere two years, then why isn't it happening already?

The answer is obvious: The plan is nonsense. If the plan was viable, it would be attracting hundreds of millions of dollars of capital right now from the free market.

Mike "Mish" Shedlock
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