Once again, this raises so many questions as the devil is in the details but we'll talk about that another time. For now, your nanny state awaits you - your left pocket is being robbed to pay your neighbor's right.
- The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds, government officials said.
- The proposal is aimed at assisting borrowers who owe their banks more than their homes are worth because of plummeting prices, an issue at the heart of the nation's housing crisis. Under the plan, the Federal Housing Administration would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government.
- If enacted, the plan would mark the first time the White House has committed federal dollars to help the most hard-pressed borrowers, people struggling to repay loans that are huge relative to their incomes and the diminished value of their homes. That may offer encouragement to the banking industry (yes, the most important constituents) and help silence Democrats, who have accused the White House of rescuing Wall Street investment banks while ignoring distressed homeowners.
- The initiative now being crafted could provide relief to a select group of homeowners who are "under water" on their mortgages, a term that describes the situation when falling home prices leave borrowers with negative equity. These homeowners would have to agree to stay in their homes after refinancing, be able to afford the new monthly payments and have lenders who are willing to go along with the plan, officials said.
- An estimated 8.8 million households currently have negative equity, due in part to the rise of loans that often required no money down. Negative equity becomes a problem when the homeowner can no longer make mortgage payments. If the homeowner had some equity, the loan could be refinanced or the house could be sold. But a homeowner who is under water cannot afford to do those things because the new loan or sale proceeds would not cover the cost of the existing mortgage.
- In a recent report, Merrill Lynch identified negative equity as a prime cause of rising default rates, saying borrowers who already have poor credit records are often deciding it makes sense to walk away from their homes when the values fall.
- Federal Reserve Chairman Ben S. Bernanke has called on lenders to restructure some loans, arguing that it would be less costly to forgive some debt than to foreclose on the properties. [Mar 4: A lot of "News" Today that We've Been Discussing for Months]
- To spur bankers to action, Frank and other Democrats are working on legislation that would allow the FHA to insure an additional $300 billion in mortgages on which lenders have agreed to accept partial losses. Under Frank's proposal, the new loan could be worth no more than 85 percent of the home's current appraised value. It would also have to meet FHA loan limits, which were raised significantly by the economic stimulus bill recently signed by the president and are currently set at about $730,000 in the Washington area. Homeowners would have to meet stringent eligibility requirements and would be required to share any profits if they sold or refinanced within five years.
- Depending on its final scope, the proposal could further rile conservatives in Congress alarmed by what they see as a new tendency by the White House to interfere with market forces. (who knew I was a conservative in nature?)
- ...the median down payment is 9% (down from 20% in 1989), 29% of buyers put nothing down, and many borrowed more than the cost of their home [Feb 29: Faced with Mortgage Default, some US Homeowners Walk Out]
- ...for the first time on record (since records began in 1945) people owe more on their home in aggregrate than equity [Mar 6: House ATM Creates Overleveraged Americans]
- ...Alt A mortgages from 2005-2007 vintage are defaulting at a scary rate [Mar 19: Alt A Mortgages Beginning to Break Down]
- ...home prices are falling 10%+ year over year [Mar 25: Home Prices Fall 11.4% in January]
As I keep repeating here is the big secret - while it stinks for all of us homeowners now to see the value of our asset degrade, the best thing that could happen to Americans as a whole is to devote a much lower % of our monthly expenditures for housing costs. There is only 1 way to get there - the median home price (and associated rentals) need to fall in price. Then we'd have money to pay for things we are fighting globally for ... i.e. fuel and food. But instead we want to support these prices artificially. This is pure Washington DC logic at it's best.
When Bush gets back from Europe we need to fear this from the short side because the Kool Aid will be rolling (no matter what devil is in the details) and as the article said best "That may offer encouragement to the banking industry - yes last I checked socializing losses offers a lot of encouragement.... when times are good you win, when times are bad, the taxpayer loses. Wall Street wins either way. Who wouldn't be encouraged in that system?
****************
Meanwhile, your state government is cutting services and potentially raising your taxes (another thing we predicted) because the housing bubble is what helped support state government spending the past half decade and unlike our federal government which can print print print, the local governments don't have that luxury. So who gets squeezed in the middle? Us. I've said countless times this "housing is 4.5% of GDP" is a red herring - our whole finance based economy is based on bubble asset pricing; especially in the past decade on housing values.
- State budgets have been hit hard by a worsening national economy, including rising costs for energy and health care. In addition, fallout from the subprime mortgage crisis -- declining home sales, deflated property values and mounting foreclosures -- has caused a slide in states' anticipated tax receipts. Revenue from property taxes, sales taxes and real estate transfer taxes is affected.
- Instead of raising taxes, most states with shortfalls are curtailing services, and the effects are already being felt nationwide. Some of the most dramatic cuts are being made in California, Maine and Rhode Island, according to budget experts, with New Jersey not far behind.
- At least half of the nation's states are facing budget shortfalls, some of them severe, and policymakers in most of the states affected are proposing and passing often-painful measures to trim costs and close the gaps. Spending on schools is being slashed, after-school programs are being curtailed and teachers are being notified of potential layoffs. Health-care assistance is being cut for the elderly, the disabled and the poor. Some government offices, such as motor vehicle department locations, will start closing on weekends, and some state workers are receiving pink slips.
- Some analysts worry that the impact is being felt disproportionately by the most needy. "It's disappointing, the extent they tend to focus their cuts on the most vulnerable, It does appear to disproportionately affect low-income people."
- In most states, talk of raising taxes has become politically perilous, particularly with residents already hurting from falling housing values and a worsening economy.
- California is facing the worst budget crisis, with a $16 billion shortfall, and Gov. Arnold Schwarzenegger (R) has proposed a $4.8 billion cut in education services. About 20,000 teachers, counselors, librarians, nurses and other support staff members have received notice of potential layoffs, according to the state's Education Department.
- A recent 50-state survey by the Associated Press showed that hundreds of thousands of poor children, the disabled and the elderly stand to have their health coverage eliminated as a result of budget cuts, and more than 10 million people would lose access to dental care, specialists and name-brand prescription drugs.
- Budget experts said they see a repeat of the pattern that happened during the recession of 2001: States generally cut health services and medical benefits first, because these costs are often rising more rapidly than others, and the savings tend to be immediate.
