On first look this is crazy.
If Mr Jones can’t pay his mortgage at 5%, the bank loses its money and has the property as collateral, which is probably not worth having.
The state now proposes to introduce a scheme where Mr Jones can park 1/3 of the debt and only pay for the 2/3 left. This can last up to 5 years. The bank gets paid 10% on the one it “parks”.
Look at the his from the opposite (or real) perspective – the bank has a loan which is underperforming, the state doesn’t want the bank to write off the mortgage, so the state is paying the bank 10% interest so that the bank will transfer the 1/3 of the distressed loan.
Why is the state (i.e. us) paying 10% on a 5% loan? Not only that, but after the loan is reinstated the borrower proceeds to pay interest on the same money again. So that bank gets paid twice for the same money, making in this scenario, 15% on a 5% loan.
This favours the banks far far more than the customer and again it’s at the expense of the taxpayer. I would suggest that instead of this banks with distressed loans be offered a scheme where they are required to request a serviced like this for each distressed mtg where payments are being made i.e. where borrowers have not simply walked away.
The bank would be allowed to park 1/3 of the loan but at half of the interest being paid by the borrower, so the bank would receive 2.5% in this scenario. The bank gets some money for the loan its parked but more importantly the loan continues to perform, making the bank the big winner still. After the loan is reinstated, the borrowed proceed to pay the full 5% but 2.5% goes back to the state until the state (i.e. us) have been repaid in full. Call it a floating interest payment service.
I’m sure this idea could be refined by the brilliant minds here at AAM but surely anything is better than taxpayers once again overpaying to save bankers from their own bad lending.
M