This program provides a substantial incentive for holders of first mortgages to reduce the original amount of property; however, the program will be creating a situation in which the second mortgage holder (in most cases the banks) will have a huge advantage. By substantially reducing the required payment on the first mortgage, the second mortgage will hold considerable value. For example, the program provides incentives for the first mortgage holder to reduce principal by having the Federal Housing Authority guarantee a new loan at 97.75 percent of the current market value. This is far more that the holder of the first mortgage would collect if the loan went through a foreclosure process. However, the payment on the second mortgage would be unaffected. The major banks have vast portfolios of second mortgages; therefore, the biggest winners are likely again to be the banks.
Title: Economist Who Foretold First Housing Bubble Says, ‘Beware’
CEPR Statement on Obama Administration’s Housing Initiative
Source: Center for Economic and Policy Research (CEPR), March 26, 2010
Researcher: Jessica Wiehr
Faculty Evaluator: Professor Andrzejewski
St. Cloud State University