Details of Obama Housing Plan: Not So Bad After All 19 comments
an article to
-
Font Size:
-
Print
- TweetThis
Lots of people are already complaining about Obama’s housing plan unveiled Wednesday based on the presumption that it is bailing out lenders and homeowners who made poor decisions at the expense of those who are paying their mortgages on time each month. Here are the details of the actual plan, which don’t seem as bad as some are claiming with respect to moral hazard.
1) Allow Responsible Homeowners to Refinance their Existing Mortgage (4 to 5 million households)
You may not think the government would need to intervene in order for this to happen, but Fannie Mae and Freddie Mac do not guarantee loans if the loan amount is more than 80% of the home’s value. This is a problem in the current housing environment because with housing prices dropping so rapidly, home owners who are paying their mortgage on time still may not qualify for a refinance, even if they are current and simply want to lower their payments since interest rates have fallen.
The Obama plan lifts the loan-to-value cap for refinances to 105% from 80%. As a result, responsible home owners who want to refinance their mortgage to a lower rate can do so, as long as their loan balance is no more than 105% of their home’s value. This change will reduce monthly payments for many responsible borrowers and therefore help prevent future foreclosures.
2) Offer Incentives to Lenders and Borrowers to Modify At-Risk Mortgages (3 to 4 million households)
Since not all mortgages are guaranteed by Fannie and Freddie, Obama’s plan provides incentives for lenders to work with borrowers who are at-risk of default before they become delinquent. Currently most lenders require you to be a few months behind on your mortgage before they work with you on a loan modification.
This plan offers lenders cash payments for every modification they complete. To prevent lenders from dropping the monthly payment by a very small amount simply to collect the upfront fee, they are offering another incentive payment if the loan remains current for a year after the modification.
As for what amount the monthly payments should be adjusted to, the government is offering incentives for loans that total no more than 38% of the borrower's income. The government will subsidize the mortgage interest by 7% of income, so that the monthly payment will equal 31% of monthly income.
The lender will still decide if it wants to modify a loan or not, so the government is not forcing them to do anything, but merely providing incentives to try and reduce future foreclosures for at-risk mortgages. If you lose your job and are facing foreclosure, adjusting your payment to 31% of income may allow you to keep your home in some cases, but clearly not all of them. Investment properties owned by speculators do not qualify under this program.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
jegan
If the whole point of this plan is to stop foreclosures so that housing prices can stabilize, it's missing a BIG chunk of "responsible" home buyers: those who can afford their payments but are so underwater that it doesn't make good financial sense to keep the house anymore.
Prices from 2005/2006 have plummeted more than 40% in many areas (more than 50% in some), and show no sign of bottoming out yet. If your mortgage is 106% or more over your home's current value -- which is very likely if you bought recently and even put the 'normal' 20% down -- you still have absolutely no financial incentive to keep your home.
Look at it this way:
- Home prices are still dropping. They will continue to drop for at least another year -- or 3 years, given the number of ARMs that will reset through 2012
- Once prices stabilize, the best you can hope for is an "average" price increase rate of ~4% per year.
- Many home owners would be better off, financially speaking, foreclosing today, waiting the ~7 years, and re-buying their house.
Example:
- A home buyer had put 20% down in 2006; say $40k on a $200k house; leaving a mortgate of $160k
- The house has lost 40% of its value, the value now being $120k, and mortgage now in the $150k ballpark (optimistically)
- 105% of $120k is $126k...so, no help there
- Say prices start rising today (which is not realistic, but let's just say) at 4%/year
- After 7 years the house price is $158k: above water but nowhere near break-even
- Break-even would take twice as long, and that's only if you sell it yourself with no realtor fees
So, financially speaking, this home owner's foreclosure decision basically boils down to whether or not he feels like he can regain his down payment in less than 15 years via other investments -- and my guess is that, for most "responsible" borrowers, the answer is yes, they can.
Sure, maybe your home has sentimental value, etc, but if you ever want to retire....
Just a thought.
No vague argument that “keeping the Joneses solvent will support the values of the entire neighborhood” because the responsible homeowners already realize this – which is why THEIR sweat equity is at risk.
The responsible homeowner also understands, at least intuitively, that the bailed out slacker/irresponsible neighbor who couldn’t afford that add on master suite and pool will STILL get to keep the pool – at a subsidized mortgage rate.
Yes actually, I do proffer a solution. Namely: the mortgage companies are mostly underwater already and subsidized by the ‘taxpayer’ (nyet –CITIZEN and responsible neighbor). The good neighbor need to see some tangible benefit from this mess, subsidizing the bad banks, the bad mortgage lenders, and the bad neighbor. That is the social solution.
The technical solution is the citizenry –those supporting the bad banks – demand the banks accept a lower rate of return on the good mortgage and lower EVERYONE’s mortgage rate into the 4.25 rangege (no points, no costs).
Yes that will extend the period that it will take the bad mortgage bank to pay back the good neighbor/citizen – but the good neighbor is accepting early partial payment immediately through lower mortgage payment and increased monthly household cashflow.
This number is huge & will drive prices even lower for years to come.
The next 700 billion bailout will be for municipalities/cities to replace falling revenue due to real estate taxes dropping.
Removing 2 million of these homes from the market will drive supply to the lowest level in years. This will increase demand & prices will bottom & then rise.
This will increase the value of all homes including the 9 million upside down owners who can now sell or refinance.
Lenders will lend on increased demand & rising home values. (not declining).
Send the 2 million homes to local HUD agencies for section 8 housing.
Sell 600 billion in 30 year bonds to finance purchase of homes.
Lenders will have a fresh pool of funds to lend from.
Remove declining assets from balance sheets.
Prop up home values for city/Muicipalities property tax revenue.
This will work.
It drives cash flow to the homeowner regardless of mortgage balance because it is based on the homes market value.
It is not a mortgage so it can be used on private label securitizations, jumbo loans and home purchase applications.
We are all looking in the wrong place for a solution.
USAffordableHome.com
On Feb 20 09:09 AM D_Virginia wrote:
> I don't think the 105% cap is useful.
>
> If the whole point of this plan is to stop foreclosures so that housing
> prices can stabilize, it's missing a BIG chunk of "responsible" home
> buyers: those who can afford their payments but are so underwater
> that it doesn't make good financial sense to keep the house anymore.
>
>
> Prices from 2005/2006 have plummeted more than 40% in many areas
> (more than 50% in some), and show no sign of bottoming out yet.
> If your mortgage is 106% or more over your home's current value --
> which is very likely if you bought recently and even put the 'normal'
> 20% down -- you still have absolutely no financial incentive to keep
> your home.
>
> Look at it this way:
>
> - Home prices are still dropping. They will continue to drop for
> at least another year -- or 3 years, given the number of ARMs that
> will reset through 2012
>
> - Once prices stabilize, the best you can hope for is an "average"
> price increase rate of ~4% per year.
>
> - Many home owners would be better off, financially speaking, foreclosing
> today, waiting the ~7 years, and re-buying their house.
>
> Example:
>
> - A home buyer had put 20% down in 2006; say $40k on a $200k house;
> leaving a mortgate of $160k
> - The house has lost 40% of its value, the value now being $120k,
> and mortgage now in the $150k ballpark (optimistically)
> - 105% of $120k is $126k...so, no help there
> - Say prices start rising today (which is not realistic, but let's
> just say) at 4%/year
> - After 7 years the house price is $158k: above water but nowhere
> near break-even
> - Break-even would take twice as long, and that's only if you sell
> it yourself with no realtor fees
>
> So, financially speaking, this home owner's foreclosure decision
> basically boils down to whether or not he feels like he can regain
> his down payment in less than 15 years via other investments -- and
> my guess is that, for most "responsible" borrowers, the answer is
> yes, they can.
>
> Sure, maybe your home has sentimental value, etc, but if you ever
> want to retire....
>
> Just a thought.
The plan does not seek to rescue everyone facing foreclosure, but it should help slow the decline of prices so people can make more rational decisions.
I really like the idea of giving the good mortgage payers a lower rate on their loans. These are people who should feel valued and be rewarded for good behavior.
Unfortunately the housing bubble created unrealistic prices and people that do not have the means to remain in their homes and I think it is not a good idea to have the nation plunge into the debt, debt that may in fact be way over our financing abilities.
Who wins?
* The bank, by avoiding a costly foreclosure.
* The homeowner, by getting free relo money and a
chance to rent something affordable.
* The taxpayers, by spending only $9 billion instead of $75 billion.
You could even give the $2,000 each and the total bill would only be $18 billion!!!
"Example:
- A home buyer had put 20% down in 2006; say $40k on a $200k house; leaving a mortgate of $160k
- The house has lost 40% of its value, the value now being $120k, and mortgage now in the $150k ballpark (optimistically)
- 105% of $120k is $126k...so, no help there
- Say prices start rising today (which is not realistic, but let's just say) at 4%/year
- After 7 years the house price is $158k: above water but nowhere near break-even
- Break-even would take twice as long, and that's only if you sell it yourself with no realtor fees"
On thee contrary NAR shows the average US home in 2006 to be worth $221,900 and as at Dec 2008 $175,400, or 79% of the 2006 value; the very 20% you are speaking of as equity.
105% of is $184,170 or 83% of the original price. Let's assume what is happening in California right now with the increased volume of sales sustains itself for the next quarter; even with that market claiming sales at half the value of 2008 moth/year over year; it is the volume of sales that will have a twofold effect. Yes some folks will sell low, but the inventory of available homes will be gin to deplete and the bargains will move off the shelf; lets say it takes a year befoe prices begin to rise:
2009 $175,400 Volumes declining, demand increasing
2010 $178,900 @ 2%
2011 $186,064 @ 4% Possible economic recover commencing?
2012 $193,507 @ 4% Demand up
2013 $203,182 @ 5%
2015 $213,341 @ 5% Balance of 30 year 4.26% Mortgage $166,365
Existing mortgage on $221,900 would have been $177,520 30 years at 6.95% (highest rate for the year); the balance as at 2015 would be $158,721, but the principal and interest payment would have been $1,175 mth vs $907 mth. under this plan. Over 60 months that is $16,080.
So;
Sale in 2015 for $213,341
Mortgage Bal: (166,365)
Commissions ( 12,800)
Mortgage saving 16,080
Balance $50,256 Original Equity: $44,380
Not much of a gain I admit, but not the loss you project and should the market recover better
You're ignoring shadow inventory. You're ignoring the second wave of Alt-A and Option ARMs, most of which won't be helped by Plan Obama.
Why would someone wait until 2015 hoping to just get back to even when they could walk away now, rent something for half as much, and not have any downside risk other than to their credit score?
National prices may have had a curve-shaped housing bubble, but there are a number of areas that had a steep spike.
In high-end areas near DC, inside the beltway, housing prices haven't suffered that much -- they have leveled off and slumped as many predicted.
The suburbs, however, have suffered tremendously, seeing very steep rises as they built up in the early 2000's, and equally steep drops in 06/07/08. In those areas, many homes are selling for late-90's prices. It's scary.
Sure, it's a nonstandard foreclosure trend that's driving it, and a lack of lending, and unemployment, etc, but those trends are maintaining or increasing, and are rapidly becoming standard, at least for the next few years.
Also, don't let the reported numbers fool you, with all the foreclosure moratoriums, it's much worse than the NAR would like anyone to think.
On a side-note, I find it thoroughly hypocritical that Wall Street would cheer the bank bailout but jeer the homeowner bailout, as both are equally inequitable and equally necessary to keep the economy from crashing much, much harder.
On Feb 20 03:09 PM P. K. wrote:
> D_Virginia:
>
> "Example:
>
> - A home buyer had put 20% down in 2006; say $40k on a $200k house;
> leaving a mortgate of $160k
> - The house has lost 40% of its value, the value now being $120k,
> and mortgage now in the $150k ballpark (optimistically)
> - 105% of $120k is $126k...so, no help there
> - Say prices start rising today (which is not realistic, but let's
> just say) at 4%/year
> - After 7 years the house price is $158k: above water but nowhere
> near break-even
> - Break-even would take twice as long, and that's only if you sell
> it yourself with no realtor fees"
>
> On thee contrary NAR shows the average US home in 2006 to be worth
> $221,900 and as at Dec 2008 $175,400, or 79% of the 2006 value; the
> very 20% you are speaking of as equity.
>
> 105% of is $184,170 or 83% of the original price. Let's assume what
> is happening in California right now with the increased volume of
> sales sustains itself for the next quarter; even with that market
> claiming sales at half the value of 2008 moth/year over year; it
> is the volume of sales that will have a twofold effect. Yes some
> folks will sell low, but the inventory of available homes will be
> gin to deplete and the bargains will move off the shelf; lets say
> it takes a year befoe prices begin to rise:
>
> 2009 $175,400 Volumes declining, demand increasing
> 2010 $178,900 @ 2%
> 2011 $186,064 @ 4% Possible economic recover commencing?
> 2012 $193,507 @ 4% Demand up
> 2013 $203,182 @ 5%
> 2015 $213,341 @ 5% Balance of 30 year 4.26% Mortgage $166,365
>
>
> Existing mortgage on $221,900 would have been $177,520 30 years at
> 6.95% (highest rate for the year); the balance as at 2015 would be
> $158,721, but the principal and interest payment would have been
> $1,175 mth vs $907 mth. under this plan. Over 60 months that is
> $16,080.
>
> So;
>
> Sale in 2015 for $213,341
> Mortgage Bal: (166,365)
> Commissions ( 12,800)
> Mortgage saving 16,080
>
> Balance $50,256 Original Equity: $44,380
>
> Not much of a gain I admit, but not the loss you project and should
> the market recover better
I would suggest the ongoing vitriol and pessimism often expressed only suggest inaction and fear. Study the facts, think for yourselves; these are tough times indeed and many of us will suffer the difficulties of the day, but this too shall pass, and here and there if you look hard enough you might just find a few tidbits of value. The flip side to the loss of value argument above is that those buying into the declining market will make money on the upside; the average turnaround on a home is five years, so the suggestion to walk away is also the option to pass up on opportunity. Study your market and use common sense.
Where they were in 2006 is irrelevant; it is where they are today and what does that translate into tomorrow. Face it the past is the past, what they were worth in 2006 is as relevant to this discussion as where they were in 1886. That money is lost, if it was ever there; move on.
Of course there is a serious problem and it appears if one states the largest percentage of loss that they have heard without verifying the number and determining what that number represents; e.g. prior to 2006 what was the increase of value in these homes? from what level? is it a 50% loss on a 40% gain, therefore perhaps only a 10% loss on market value? or is it a 50% loss on true value? What a home asks on the market and what it sells for, which is the true value of the home?
It is easy on both sides of the equations to manipulate the numbers; but the fact is over 50% of US homes that were mortgaged were mortgaged with subprime vehicles in 2006; in one news item just on CNN this evening a community in Florida had over 60% of the foreclosed properties had been held by speculators who walked from their obligations; I expect that a number of these same speculators will be back buying these same homes after they’re foreclosed. For the other 40% it is their home. Who would you like to help?
> PK -
>
> National prices may have had a curve-shaped housing bubble, but there
> are a number of areas that had a steep spike.
>
> In high-end areas near DC, inside the beltway, housing prices haven't
> suffered that much -- they have leveled off and slumped as many predicted.
>
>
> The suburbs, however, have suffered tremendously, seeing very steep
> rises as they built up in the early 2000's, and equally steep drops
> in 06/07/08. In those areas, many homes are selling for late-90's
> prices. It's scary.
>
> Sure, it's a nonstandard foreclosure trend that's driving it, and
> a lack of lending, and unemployment, etc, but those trends are maintaining
> or increasing, and are rapidly becoming standard, at least for the
> next few years.
>
> Also, don't let the reported numbers fool you, with all the foreclosure
> moratoriums, it's much worse than the NAR would like anyone to think.
>
This rules out most people in AZ, NV, CA, and FL right off the bat. Furthermore, the guy (me) who put down 40% on his home, gets no relief, but the idiot who put nothing down stands a better chance.
F*ck this plan and the 'entitlement' attitude about owning a home. It's not a given. You work for it.
On Feb 20 09:09 AM D_Virginia wrote:
> I don't think the 105% cap is useful.
>
> If the whole point of this plan is to stop foreclosures so that housing
> prices can stabilize, it's missing a BIG chunk of "responsible" home
> buyers: those who can afford their payments but are so underwater
> that it doesn't make good financial sense to keep the house anymore.
>
>
> Prices from 2005/2006 have plummeted more than 40% in many areas
> (more than 50% in some), and show no sign of bottoming out yet. If
> your mortgage is 106% or more over your home's current value -- which
> is very likely if you bought recently and even put the 'normal' 20%
> down -- you still have absolutely no financial incentive to keep
> your home.
>
> Look at it this way:
>
> - Home prices are still dropping. They will continue to drop for
> at least another year -- or 3 years, given the number of ARMs that
> will reset through 2012
>
> - Once prices stabilize, the best you can hope for is an "average"
> price increase rate of ~4% per year.
>
> - Many home owners would be better off, financially speaking, foreclosing
> today, waiting the ~7 years, and re-buying their house.
>
> Example:
>
> - A home buyer had put 20% down in 2006; say $40k on a $200k house;
> leaving a mortgate of $160k
> - The house has lost 40% of its value, the value now being $120k,
> and mortgage now in the $150k ballpark (optimistically)
> - 105% of $120k is $126k...so, no help there
> - Say prices start rising today (which is not realistic, but let's
> just say) at 4%/year
> - After 7 years the house price is $158k: above water but nowhere
> near break-even
> - Break-even would take twice as long, and that's only if you sell
> it yourself with no realtor fees
>
> So, financially speaking, this home owner's foreclosure decision
> basically boils down to whether or not he feels like he can regain
> his down payment in less than 15 years via other investments -- and
> my guess is that, for most "responsible" borrowers, the answer is
> yes, they can.
>
> Sure, maybe your home has sentimental value, etc, but if you ever
> want to retire....
>
> Just a thought.