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Wilbur Ross: Obama Foreclosure Fix Not Enough

Heated debates flooded market analyst inboxes and traders' IM channels today on the issue of whether the Obama administration's newly-announced plan to subsidize foreclosures with credits to servicers, lenders, and borrowers at risk of losing their home would be enough turn around the nation's ailing housing and mortgage markets. While the jury is still clearly out, at least one legendary investor isn’t counting on the government’s plan to have the sort of impact some are expecting.

Distressed asset investor Wilbur Ross, of WL Ross & Co., told HousingWire that by his estimate, risky mortgage lending practices have to-date placed around $2.4 trillion of American homes underwater and at a subsequent risk of foreclosure.

Obama’s plan earmarks $75 billion to reach an estimated 9 million homeowners over five years. That’s $8,000 per borrower, broken down to $1,600 a year, to offset the cost of mortgage modification. Ross told CNBC’s Squawk Box this morning, “Does anyone really think that all that keeps 9 million people from losing their homes is $1,600 per year? I don’t think so.“

Ross has plenty of skin in the mortgage servicing game, as he owns Irving, Tex.-based American Home Mortgage Servicing, Inc., which recently became the nation's largest third-party servicer with the acquisition of a large portfolio from Citigroup Inc. (C). See earlier coverage.

Last week, Ross told HousingWire in an interview that he thinks the best way to motivate lenders, servicers, and homeowners work together on modifications requires far more than what's been proposed so far. In particular, he believes that what's needed is aggressive principal modifications for borrowers most in need. He has said that his American Home servicing shop has seen six-month recidivism rates below 20 percent -- compared to the 50 or 60 percent standard in the industry -- because the servicer has been aggressively looking to cut principal balances.

"The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,” Ross told HousingWire. “They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default."

The Homeowner Affordability and Stability Plan does some of that, but doesn't go far enough, Ross suggested. "The have to reduce the principal amount of loan, not just nonperforming loans, but also performing ones," he told CNBC. "Why should a guy who's not paying benefit, while some poor citizen who's struggling to make the payments gets stuck with the mortgage?"

His own plan looks something like this:

1. The lender takes a write-down in principal, and the servicer takes a similar hit on any servicing strip on the newly-reduced UPB. 2. After principal reduction, the government guarantees half of the remaining principal the lender now holds. 3. This guarantee of half the principal can now be sold into the securitization market, which will give the lender an income stream on the home again and offset some of the losses the owner of the loan has to take when they write down the principal. 4. When the house is sold, if the value of the home has gone up at the point of sale, the homeowner and the lender share in the profits earned on the gain.

Ross isn't the first to suggest an home equity sharing plan, and there are clearly strong complexities in how any such plan would be put together, particularly as it relates to second lien holders and/or investors in junior bond classes. But the fact that a large investor with such a strong hand in the servicing business is suggesting it's possible at all to accomplish is something that perhaps bears more attention than the idea has been getting as of late.

Ross clearly isn't pulling any punches, either, and suggested that JPMorgan Chase (JPM) chief executive Jamie Dimon -- who earlier had praised the Administration's housing plan -- was doing so at the government's bidding. "If I had TARP money, I'd be a creature of the government, too," he said in the CNBC interview.

Deutsche Bank chief US economist Joe Lavorgna says of Ross’s plan, “Any move that allows people to get equity again in their home is a really good thing.” But he also cautions that “mitigating home foreclosures will slow a decline in home prices, but that doesn’t necessarily put a floor on them.

"We have to change the fact that home ownership is now more expensive than rent to make an impact to the housing problem.”

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