Obama's Foreclosure Plan: A Closer Look 38 comments
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The more you look at the Obama foreclosure remediation plan the more you get that queasy feeling. Not the cost so much but just the sense that they really haven’t thought this through. Let me give you an example.
According to what we know right now, anyone with a Fannie or Freddie loan will be allowed to refinance so long as the value of the house doesn’t exceed 105% of the new loan. The goal is to get the interest rate down to a level that produces an acceptable level. But for now we’re just going to concentrate on the potential inequity inherent in this little corner of the plan.
Consider Neighbor A and Neighbor B. Both own the same tract home that they bought for $200,000 five years ago. Both put down 5% but A borrowed 95% of the purchase price - $180,500- and has mortgage insurance covering the amount above 80%. Home owner B borrowed 80% or $152,000 and took out a purchase money second mortgage or a HELOC for the balance - $28,500. So borrowers A and B owe exactly the same amount of money on their homes. The loans just happen to have been structured differently.
Now, for purposes of making the math simple, assume that both loans have had no appreciative amortization of principal (not far from reality for a 30 year mortgage). Both are struggling and prices have declined 25% so that now both houses are worth $150,000.
Based on the announced parameters for the program, Borrower A is out of luck as his mortgage exceeds 105% of the value of the home. Borrower B, however, is home free as his first mortgage - $152,000 - is well within the limit. Borrower B only has to worry about the second lien holder agreeing to the refinance. But why wouldn’t they? As things stand they have nothing so go with the flow and hope prices eventually bail you out.
Two homeowners, the same basic circumstances surrounding their purchase just a difference in loan structure, Do you want to convince A that equity has been achieved?
It could get worse but we have to see the details first. For instance, there was no talk about FICO scores or credit quality in the released details. Many borrowers have discovered that if they don’t pay their second mortgage on a badly underwater house there is little the junior lien holder can do about it. Even if you require that they be current on the second at the point of refinance what prevents them from defaulting thereafter. Nothing has changed. The holder of the second has not seen his interest improved at all. It’s a game waiting to be played.
I don’t want to pick this thing apart but I really am beginning to think that it’s a fool’s errand. Far better for government to concentrate on people and not assets. Let the foreclosure nightmare run its course. In the end we arrive at a housing market that is much more reasonably priced for the next generation. In the meantime, direct all of that money towards putting those who are losing their property back on the road to a new life.
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Obama chooses Mesa, AZ as 'ground zero' for unveiling the mortgage 'plan'. Did he not think to do some quick math and realize that nearly EVERYONE he was speaking to (Phoenix area) CANNOT take part in this 'plan' because they don't fit the small parameters that are allowed?
Ironically he chooses a place that can't be helped by another one of his not-thought-out plans. Even the high school kids listening picked up on the garbage factor.
Wake up America! How can we continue to let these 'plans of action' continue to roll out?????
My prediction: 10-20% inflation PER YEAR for at least 3-4 years beginning 2010. Why not buy some bank owned homes cheap, hang on to them for a few years, and make a killing - AND, if it doesn't for some reason, work out - just walk away at the end. Someone will bail you out down the road.
On Feb 20 01:55 PM AlexR wrote:
> Neighbor A just needs to stop whining about inequity and understand
> the fact that if Neighbor B goes into foreclosure, that house will
> sell in auction for $100K or less. And as if that was not enough
> to bring Neighbor A's house price down with it, wait until the new
> investor-owner (as most foreclosure buyers are) rents it out. Once
> Neighbor B is gone Neighbor A will think geez, they were such nice
> neighbors. And when everyone around him are renters and empty houses,
> good luck selling, even for $100K.
>
> This whole fairness outcry has really reached childish proportions.
> Just suck it up and look at the big picture.
And, why is it we worry about asset deflation...when we should encourage and hope for income growth...
College tuition...cable TV costs and ohter aspects of the economy have risen far faster than housing........
Lending did over leverage income and distort housing values, which was wrong.....
However, and I say this from current experience, aside from the afore mentioned distortion, the real issue isthe stability of household income....
As jobs are cut, wages frozen and overtime and bonuses whither away, we need to be reminded that 65% or so are homeowners.....their real problem is not the house payment, but their income stability.......
As I have commented before, 100%v of those I cousel who are in trouble with their homes have lost 30-50% of their income...or more.....
Lender screwups may have been the story in the beginning, but its been income and job stability for a long time now.....
On Feb 20 03:35 PM User 347440 wrote:
> House price to income levels are still above historical. This means
> the average person still can't afford a house unless some exotic
> loan tactic is applied. House prices still have to come down so that
> people can afford them in the new lending environment (money down,
> verified income, etc.). The days of credit for nothing are over.
I, Remove 2 million homes from the MLS (for Sale) that financial institutions currently have
for Sale. Any Institution that received TARP funds will be required to first offer the home
to the RTC for purchase. RTC will not purchase any home above $417,000. No Jumbos.
2, Government Resolution Trust will purchase these homes from these institutions for 20%
less than original first Mortgage amount. No negotiating.
3, 600 billion dollars to buy these homes (app $300,000 each average) will come from the sale
of long term 30 year bonds. (Currently app 3-5%) issued by Government.
4. RTC will send these homes to the local HUD offices for disposition thru voucher program
(rentals). $5000 will accompany each home for repairs & upkeep. eventually as the MLS
system reaches certain inventory levels (i.e. 30-60 days) HUD will be allowed to place these
homes on the sale market. If the inventory increases HUD will remove homes accordingly.
This will be a local HUD market decision, differing from region to region. Rental Income will
help cover expenses such as maintenance, insurance and property taxes.
Pro's:
Supply/demand economics will create a bottom in the housing market once 2 million homes
for sale are removed. Prices will start to increase.
Local governments will see a bottom in declining values and revenue will increase as values
slowly stabilize and slowly increase.
Individual homeowners as well as other sellers will find a housing market ready and able
to absorb the inventory.
Banks will now have a fresh source of funds to lend on homes that are not declining in value.
Banks will be able to clean balance sheets of hard to liquidate assets.
Lending/leverage/credi... markets will slowly begin to return to normal. Applications will
increase, appraisals, home inspections, title work, all types of stimulating activity for business.
As home prices stabilize and increase the local HUD agency selling homes over a 3-7 year time
frame will see prices rise for properties purchased by the RTC. HUD will only be required to
return to RTC the original amount of the purchase price plus the 20%. Or the original amount of the
selling banks first mortgage.
Once the RTC is closed and all homes sold, all losses (if any) will be covered proportionately
by the selling institutions. All financial Institutions selling homes to the RTC will share the loss
at the RTC as a percentage of total homes purchased and homes sold to the RTC. That percentage
will be the Banks percentage for covered losses. These losses will be paid by the banks over a 30 year period liquidating the original bonds sold to finance the purchase.
Other agenda items:
Mark to Market accounting will only apply to non performing assets.
Spend 50 billion each year for the next 3 years rebuilding infrastructure. Bridges, Roads, tunnels,
water plants, dams, levies anything to create jobs.
Stimulus checks for $300 only help pay a credit card bill once
In other words "This whole fairness outcry has really reached childish proportions. Just suck it up and look at the big picture."
On Feb 20 01:55 PM AlexR wrote:
> Neighbor A just needs to stop whining about inequity and understand
> the fact that if Neighbor B goes into foreclosure, that house will
> sell in auction for $100K or less. And as if that was not enough
> to bring Neighbor A's house price down with it, wait until the new
> investor-owner (as most foreclosure buyers are) rents it out. Once
> Neighbor B is gone Neighbor A will think geez, they were such nice
> neighbors. And when everyone around him are renters and empty houses,
> good luck selling, even for $100K.
>
> This whole fairness outcry has really reached childish proportions.
> Just suck it up and look at the big picture.
Like in warfare, one would match the battle with appointing a general/admiral that befits both the particular strategic and tactical demands.
In essence, this is the problem of America in my view. During the Vietnam War we had Robert McNamara heading up defense with his star credentials in Corporate America - wrong guy for the job of fighting guerilla warfare in the jungles. Don Rumsfeld looks more like a smart social elite - again wrong guy for fighting suicide bombers. Brennen, an old-hand White House elite with expertise in Soviet Cold War - wrong guy for governing post-invasion Iraq.
As long as we continue to put "wrong" generals in the fields, we will loose and loose big.
America means Hope to me. Have we learned enough yet? Isn't it time to get smarter for a "CHANGE"?
On Feb 21 08:27 AM atlasman wrote:
> "Let the foreclosure nightmare run its course. In the end we arrive
> at a housing market that is much more reasonably priced for the next
> generation. In the meantime, direct all of that money towards putting
> those who are losing their property back on the road to a new life"
>
>
> Tom is right on in his conclusion but I wish he said "back to work
> on the road to a new life". Instead of focusing on taking money
> from one group and subsidizing another group Obama should put all
> of their effort figuring out what changes Governement can make that
> can actually help all businesses. A good start would be to hire
> a Commerce Secretary that has not cheated on their taxes that has
> significant experience building and running businesses. As pointed
> out by Politico yesterday, the Obama gang has no one with real world
> business experience. Kind of scary when you think about the problems
> we are experiencing.
On Feb 21 01:14 PM jksisco wrote:
> The Banks should be working with those that are having problems,
> period. The Government has no business getting involved. Banks could
> and should work with owner-occupied trustors to temporarily lower
> payments based on ability to pay. Foreclosed houses in a supply rich
> market generate zero to negative cash flow for the banks, some cash
> flow would be better than none. This would increase the possibility
> that some homeowners would be able to reorganize themselves in the
> near future. Most people are just looking for a hand, not a handout.
> There maybe some risk of moral hazard, but, if we're all in this
> together, then the Banks should reciprocate for the money that has
> been loaned to them. The Homeowner bailout proposed by the Government
> is just window dressing, it's really a subsidy to the banks. I was
> working in Debt negotiation for a few months, the Credit Card companies
> are settling debt for 15-50% of what they're owed, everything is
> negotiable.
You are wrong houses are expensive to own if rented or not!!! Taxes, Insurance, upkeep, vandalism.
Banks seldomly rent due to liability issues. Therefore no income.
So what do you do with 2.5 million and growing vacant homes owned by
Banks???
Over a 2 year supply if we build No new homes!!!!!
Homeowners are upside down due to this huge volume of homes being sold (given away) for less than replacement cost. Banks will sell for any reasonable amount of $ regardless of what is owed. Homeowners can't compete in this market!!!!!
We Must due the following:
Housing solution!
I, Remove 2 million homes from the MLS (for Sale) that financial institutions currently have
for Sale. Any Institution that received TARP funds will be required to first offer the home
to the RTC for purchase. RTC will not purchase any home above $417,000. No Jumbos.
2, Government Resolution Trust will purchase these homes from these institutions for 20%
less than original first Mortgage amount. No negotiating.
3, 600 billion dollars to buy these homes (app $300,000 each average) will come from the sale
of long term 30 year bonds. (Currently app 3-5%) issued by Government.
4. RTC will send these homes to the local HUD offices for disposition thru voucher program
(rentals). $5000 will accompany each home for repairs & upkeep. eventually as the MLS
system reaches certain inventory levels (i.e. 30-60 days) HUD will be allowed to place these
homes on the sale market. If the inventory increases HUD will remove homes accordingly.
This will be a local HUD market decision, differing from region to region. Rental Income will
help cover expenses such as maintenance, insurance and property taxes.
Pro's:
Supply/demand economics will create a bottom in the housing market once 2 million homes
for sale are removed. Prices will start to increase.
Local governments will see a bottom in declining values and revenue will increase as values
slowly stabilize and slowly increase.
Individual homeowners as well as other sellers will find a housing market ready and able
to absorb the inventory.
Banks will now have a fresh source of funds to lend on homes that are not declining in value.
Banks will be able to clean balance sheets of hard to liquidate assets.
Lending/leverage/credi... markets will slowly begin to return to normal. Applications will
increase, appraisals, home inspections, title work, all types of stimulating activity for business.
As home prices stabilize and increase the local HUD agency selling homes over a 3-7 year time
frame will see prices rise for properties purchased by the RTC. HUD will only be required to
return to RTC the original amount of the purchase price plus the 20%. Or the original amount of the
selling banks first mortgage.
Once the RTC is closed and all homes sold, all losses (if any) will be covered proportionately
by the selling institutions. All financial Institutions selling homes to the RTC will share the loss
at the RTC as a percentage of total homes purchased and homes sold to the RTC. That percentage
will be the Banks percentage for covered losses. These losses will be paid by the banks over a 30 year period liquidating the original bonds sold to finance the purchase.
Other agenda items:
Mark to Market accounting will only apply to non performing assets.
Spend 50 billion each year for the next 3 years rebuilding infrastructure. Bridges, Roads, tunnels,
water plants, dams, levies anything to create jobs.
Stimulus checks for $300 only help pay a credit card bill once.
Now the criminals are given handouts, and the taxpayer is asked to bail out everything that still moves.
Wake up and stop dreaming, it ain't gonna work, you know. Not only are you destroying your own future, but everybody else's too.
I think it is time the man in the street says enough is enough!
I was not born to slave for others, and I will be damned if I will slave for you, uncle!
are to blame for anything. There are many many circumstances that have led to this problem; including hurricane's Wilma and Katrina not to mention the loss of employment across the country. I always believed that in order to get his problem out of our faces is to lower everyone's mortgage to a 2% interest rate. Everyone! including those that have been paying their crazy adjustable mortgages.
On Feb 20 02:45 PM mallarde wrote:
> I am not buying the idea that it is necessary to prop up the housing
> market, presuming this is even possible. The toxic assets will be
> toxic no matter what.
>
> Rewarding bad behavior should not be the business of the federal
> government or funded by our tax dollars. How about everyone that
> LIED about their income on their loan applications?
>
> AlexR, too many assumptions go into your logic. You need to present
> something better before we force people to subsidize others' recklessness.
> And -- maybe affordable housing should be seen as a GOOD THING rather
> than a bad thing.
>
> How about all the stimulus from young families not having to spend
> 50% of their income on housing? They can buy cheap garbage from Chi...
> I mean they can buy Harley Davidsons, or something else made in the
> U.S. (Not that I like Harleys, but you get the idea.)
Teutonic
On Feb 21 01:34 PM Teutonic Knight wrote:
> I would concur with atlasman that the Obama economic team is weak,
> very weak. It comprises mainly of old hands and bureaucrats. Our
> situation is new and we need new stars and new thinkings, not the
> ones that are outdated and out-molded.
>
> Like in warfare, one would match the battle with appointing a general/admiral
> that befits both the particular strategic and tactical demands.<br/>
>
> In essence, this is the problem of America in my view. During the
> Vietnam War we had Robert McNamara heading up defense with his star
> credentials in Corporate America - wrong guy for the job of fighting
> guerilla warfare in the jungles. Don Rumsfeld looks more like a
> smart social elite - again wrong guy for fighting suicide bombers.
> Brennen, an old-hand White House elite with expertise in Soviet Cold
> War - wrong guy for governing post-invasion Iraq.
>
> As long as we continue to put "wrong" generals in the fields, we
> will loose and loose big.
>
> America means Hope to me. Have we learned enough yet? Isn't it
> time to get smarter for a "CHANGE"?
>
> On Feb 21 08:27 AM atlasman wrote:
The one thing no one wants to admit or even recognize, especially rick santelli, is the basic principles of asset backed lending. The borrower agreed to pay x dollars per month for typically 30 years. In most states people are not defaultng on contracts as many are stating they are simply excercising an option within the contract to return the asset in leau of payment. Who is responsible for making the wiser of the two decisions, the borrower or the lender, is the real question.
Taking into consideration all the factors that surround a mortgage loan it would appear to be common sense to me. The lenders bear the burden of responsibility for making wise lending decisions as they are the ones who bear the greater of the consequences as demonstrated by todays current market.
The one thing no one wants to admit or even recognize, especially rick santelli, is the basic principles of asset backed lending. The borrower agreed to pay x dollars per month for typically 30 years. In most states people are not defaultng on contracts as many are stating they are simply excercising an option within the contract to return the asset in leau of payment. Who is responsible for making the wiser of the two decisions, the borrower or the lender, is the real question.
Taking into consideration all the factors that surround a mortgage loan it would appear to be common sense to me. The lenders bear the burden of responsibility for making wise lending decisions as they are the ones who bear the greater of the consequences as demonstrated by todays current market.