are renegotiated, that means that the mortgage lenders would get anywhere from 15% to 25% less in the repayment of the unpaid balance of the mortgages,” says Bernard Anderson, a member of the Black Enterprise Board of Economists. “The question is why loan servicers would agree if they are going to take a 15% to 20% haircut on those outstanding mortgages?”
Given the costs loan servicers incur to foreclose and resell a house, and the increased difficulty for consumers to get a loan to purchase homes, there might be incentive for loan servicers to renegotiate the loan with the homeowner if they had access to advanced lending, explains Anderson, who is also a former professor of management at the Wharton School of Business.
Johnson believes that Homeowners First can drive an increase of 50% in modifications of delinquent loans, allowing upwards of 882,000 families to remain in their homes over five years, according to the Urban Trust news release. The timeline for executing the plan is dependent on whether the government approves their request and whether they can raise enough deposits.
“This is the most direct way to interact with the homeowner and at the same time protect the lenders or mortgage trustee,” says Johnson, who adds they will eventually pay all of the money back to the government. “This program is strictly aimed at providing loan modification help to homeowners through working with mortgage servicers.”
Anderson suggests that Johnson’s plan probably won’t be approved until President-elect Barack Obama’s administration is in office. Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, made a similar suggestion earlier in the year, but Treasury Secretary Henry Paulson, shot it down in favor of his plan to infuse capital into the banks. He had hoped that they would increase their lending to consumers and small businesses, something banks have been criticized for not doing.
“Bob is taking a risk, quite frankly…but it is a good idea, and he should be commended for stepping out front,” Anderson says. “It is significant that an African American businessman is coming forward to try to address the root cause of the financial crisis.”