Thursday, March 5, 2009

WSJ: Mortgage Bailout to Aid 1 in 9 Homeowners

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I won't make my normal editorial comments aside from a short comment below; I just wanted to find a piece that explains this homeowner bailout in detailed format. Let me preface this by saying with the amount of money we are using at the Federal Reserve to fund or backstop, combined with the multiple stimuli (sp?), combined with the TARP, combined with the bailouts - we could of just handed every person with a mortgage a huge check a year ago and solved 70% of the problem. Heh.

My comments specific to the mortgage bailout are if we are going to do this (which we are) it should be restricted to
  1. people who actually put a down payment (5% minimum perhaps) - if you put 0-1% down you are a renter essentially (or a rampant speculator)
  2. if you extracted equity (refinanced with cash OUT) you should not qualify - many of those people were buying nicer kitchens, cars, or funding lifestyle vacations while others (hand raised) did none of that and scrimped and saved. If you refinanced just for a lower payment but did not extract equity than no problem.
  3. Primary residence only (that *is* part of the program)
  4. anyone who gets into this program should give up all gains on sale of house 1:1 to government until the amount gained is in excess of amount they saved through the program (this would cause those who could otherwise pay but are thinking of "faltering" or "threatening to" so as to get cheaper payments, to at least think twice before they "lapse")
I will also say this program is a huge handout to the financial companies who are handling the mortgages (big surprise there). There are so many other issues but they are no longer worth debating because it will happen - I would just prefer the limitations I see above. Remember, thus far within 6 months, nearly 60% of people who have had loans modified already re-defaulted and I saw an interview where officials of this program are HOPING they only see a 40% re-default rate. That's pathetic really - it means best case we throw $4 out of every $10 out the window.

See the graphic below (click to enlarge) to see who IS and who IS NOT set to benefit

Via the Wall Street Journal
  • The Obama administration announced details of a housing-rescue plan it said would help as many as one in nine homeowners, from low-income Americans struggling to avoid foreclosure to well-off borrowers who owe more than their homes are worth. While the administration wants a sweeping program that would prevent millions of foreclosures, it doesn't want to be seen as rewarding the greedy or reckless.
  • It has two main components.
  • First, the government will offer financial incentives and subsidies to persuade mortgage-servicing companies to ease up on borrowers who are in financial straits so severe that they risk losing their homes. Borrowers will have to sign affidavits attesting to their financial hardships. In return, they will see their interest rates drop to as low as 2%, their payment periods lengthened, and other modifications aimed at bringing their monthly payments to 31% of their income -- commonly considered a reasonable ratio. This program will be limited to first-lien mortgages with outstanding principal balances that don't exceed $729,750, in the case of single-family homes.
  • Loan-servicing companies will receive up to $3,500 from the government to participate, with the government also matching a portion of the lenders' costs, dollar-for-dollar. Homeowners will get as much as $5,000 apiece in federal money to reduce their outstanding balances, as a way to encourage them to stay current on the modified mortgages.
  • The second main component of the plan calls for Fannie Mae and Freddie Mac, the government-backed mortgage giants, to refinance loans for millions of borrowers who may owe more than their homes are worth, even if they are wealthy enough to afford their current payments. There is no income ceiling for beneficiaries. But they must have mortgages held or guaranteed by Fannie Mae or Freddie Mac, and they cannot owe more than 105% of the current value of their home.
  • That raises the possibility that homeowners considered well-off by national standards may qualify for public aid.
One example with numbers
  • Under the loan-modification plan, a hypothetical borrower earning $4,000 a month, with a $225,000, 6.5% loan with 28 years remaining, could see the rate fall to 2.73%, and the monthly payment drop to $1,240, from $1,737, according to Thomas Lawler, an independent housing economist. The government would cover about $155 of the $495 payment reduction. Principal payments and federal subsidies would reduce the outstanding balance to $193,000 after five years.

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