Mortgage news this week was dominated by the announcement of Project Lifeline, a program to help mortgage borrowers who are on the brink of foreclosure.

To appreciate the context of Project Lifeline, it is important to also consider two other stories from this past week:

• Figures from the first four months of this fiscal year show that the U.S. Government budget deficit is running at about twice the pace of last year’s
• Morgan Stanley became the latest in a series of financial firms to bite the bullet because of the mortgage crisis, with the announcement that they would lay off 1,000 mortgage workers

Considering the circumstances, Project Lifeline might be the most pragmatic type of solution available.

Project Lifeline

On February 12th, Treasury Secretary Henry Paulson announced Project Lifeline, a coordinated effort by six leading mortgage lenders to work things out with distressed borrowers.

In a nutshell, Project Lifeline is a “time out” for mortgage borrowers facing foreclosure. For those borrowers who contact their mortgage lenders within a specified period, Project Lifeline can provide a 30-day freeze on mortgage foreclosure, during which the borrower and lender will attempt to work out a repayment plan.

Project Lifeline has drawn mixed reviews. On the positive side, it is much broader than earlier mortgage relief proposals, in that it applies to both prime and subprime borrowers. The time-out approach will help ease the “sticker shock” from mortgages which have seen sharp payment increases. Finally, the fact that mortgage rates have fallen a great deal in recent months adds power to the refinancing opportunity.

On the other hand, critics say the plan doesn’t go far enough to bail out distressed borrowers. Understanding why is where the next two stories come in.

Budget Constraints

There is nothing especially significant about Morgan Stanley’s announcement of mortgage layoffs here and in the UK, except that it is an example of the financial hardships that many mortgage lenders are coping with. Meanwhile, the US Government isn’t exactly flush with cash these days. Since the start of the current fiscal year (October 1st), the budget deficit has grown to twice the level of the prior year’s deficit at a comparable stage.

As the saying goes, things are tough all over. Mortgage lenders and the government are trying to help struggling borrowers, but neither has the wherewithal to provide a bailout.

Natural Selection

It maybe just as well that a bailout isn’t in the cards, because that would not be healthy for the mortgage market. Project Lifeline may be limited, but the beauty of its approach is that it will separate out those mortgages that might have had a fighting chance under different circumstances from those that were doomed from the start. In the first category, you have mortgages which have created problems for structural reasons, such as those with wildly variable payments. With a little time to restructure and refinance, especially with interest rates having fallen, many of these problems can be addressed.

In the second category, you have mortgages which are in trouble because borrowers were wildly unrealistic, or because they were speculating on housing prices. Project Lifeline won’t address those problems, and if it did, it would just cause more trouble down the road. A little natural selection now and then is a healthy thing.

Tags: borrowers, housing prices, interest rates, mortgage, mortgage lenders, mortgage rates, refinancing

This entry was posted on Thursday, February 14th, 2008 at 11:23 am and is filed under Weekly Wrap-Up. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.