**at most**one third of at risk homeowners.

In the current framing of the HSI's $75 billion in proceeds, $44 billion would go toward incentives, leaving $31 billion to fund interest rate reductions. The goal of reducing the targeted borrower universe to a 31% Debt To Income ratio is woefully underfunded based on the $31 billion residual balance. Assuming an average mortgage balance of $200,000 suggests total mortgage debt outstanding impacted would be $800 Billion, which is about a third of the $2 trillion of estimated "at risk" mortgages. $80 billion dedicated to interest rate reduction is the minimum amount needed for the plan to even have a theoretical chance of succeeding.

The figure below presents why the cost of incentives for 4 million borrowers with a loan mod plan under the Homeowner Affordability and Stability Pact would cost $44 billion over 5 years. As in the time period many of these borrowers will become delinquent the final cost will likely end up being lower.

The next analysis presents the case of a $26 billion cost of loan modifications over five years. Additionally, the analysis is based on the government's subsidizing of half the cost of reducing DTI from 38% to 31%, but there is no accounting for where the incremental cash would come to lower the 45% DTI to 38% in the first place, which is where the 4 million borrowers are currently from a DTI standpoint.

Cumulatively, assuming 4 million borrowers on the program and an average $200,000 mortgage balance, the program would cover $800 billion in mortgages, or a third of $2 trillion in at risk mortgages.

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## 3 comments:

Tyler,

wouldnt the federal reserve expand its balance sheet to reduce interest rates?

30% of at-risk mortgages is a "very limited" number? Where I come from, that's a big chunk of the market. It won't stop the decline, but it will put the breaks on.

what happens after 5 years? also, is the reduction from 38% to 31% a refi or a loan -- ie does this get added to principal so that this is in effect a negative am loan?

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