The New Foreclosure Prevention Plan

The government is out with its foreclosure prevention plan. Officially it is called Making Home Affordable (really, that’s what they named it). There seem to be two components, The Home Affordable Refinance (HAR) program and the Home Affordable Modification program (HAM).

HAR is for Fannie and Freddie borrowers who are making their payments on time. It’s essentially a program to let anyone with an agency loan refinance, provided their first mortgage does not exceed 105% of the loan amount. The borrower has to be current on their mortgage and demonstrate that they have sufficient income to service the loan. It’s basically a way to let somewhat underwater borrowers cash in on low rates.

HAM is the program for the borrowers who are sliding towards bankruptcy. The borrower has to demonstrate that basically they’re in trouble or soon will be. There is no loan to value limitation - it doesn’t matter how much your house is under water. Through a combination of lowering rates, extending amortization of the loan and principal modifications, the borrower's debt-to-income level has to be reduced to 31%. Interest rates may be lowered to 2% if necessary to meet the debt to income test. The government will subsidize part of the cost of reducing the payment to 31%.

There are a couple of catches to HAM. The interest rate is fixed for five years and then becomes an adjustable rate. Deferred principal and certain amortization extension plans may result in balloon payments. Sounds like the government is taking a page out of the subprime playbook doesn’t it?

There is a link below that will take you to all of the information you will probably ever want to see on these programs. Fair warning: it’s complicated and long. Based on my first reading I have two thoughts. One, it may well fail simply because of the complexity. Two, it’s going to be one big honeypot of money for mortgage brokers and bankers. Look for more abuse.

After I absorb all of the details, I may have a few more thoughts.

More: here

Comments

[stockdoc123:]

Owning a home is not for everyone, if they can not afford it they should find a place they can afford or rent.

Mar 04 03:22 PM

[mrmillergd:]

The plan is hardly a backstop against continuosuly falling housing prices, especially in hard-hit areas like Florida and Nevada. The market will continue to adjust - this program will just help some people take advantage of low fixed rates while they are available. The loan mods are only going to help a very small portion of homeowners.

Mar 04 03:22 PM

[cash:]

Hilarious xsellside! Yes, Obama is doing what he promised he would do. Redistribution of wealth. But from the hard working, productive prudent, to the opposite segment.

Mar 04 03:31 PM

[stockdoc123:]

Soon there will not be anymore wealth to redistribute!!

Mar 04 03:34 PM

[SPEARS:]

Don't understand your reply. I'm merely applying common sense. If you can't afford your current home, then move into one that you can afford. If you can only afford, say $1,000 a month for housing, then so be it. Whether its renting or owning, I don't care. When did it become a "right" to stay in house you can't afford? At least it seems that way. They should RENT somewhere they can afford, simple. Welfare is another issue and that's fine. I'm not cold-hearted and don't expect people to starve in the streets.


On Mar 04 03:14 PM User 171874 wrote:

> There are people starving out there!

Mar 04 03:36 PM

[maximummarket:]

I wonder if we will have 18% mortgage rates in 5 years when rates reset.

Mar 04 03:41 PM

[Stockguy456:]

I think this is walking a lot of people up!!

60 years ago this would be called communism!!

Mar 04 03:42 PM

[@TexasER:]

Are you kidding, 2% for people heading for bankruptcy? And they aren't going to setup a facility like that for the rest of us?

I'd speculate on this real estate market if I could get money at 2%. I'd just need to make sure I bought enough that I was "too big to fail". Then I'd just sit back and wait for *my* bailout.

Mar 04 03:58 PM

[Bar Lock:]

A small but important correction to the information provided in the article. The HAM program will not be issuing five year adjustbile rate loans. They are doing something a bit different.

If the loan interest rate are be lowered to fit the distressed borrower into the 31% AGI bracket, the lower interest rate will start adjusting in 5 years one percent per year until it reaches the loan rate cap which is equal to conforming fixed rates at the time of the modification plus or minus .125%

For an interest rate modified down to 2%, after 5 years it will rise to 3%, then 4%, then 5%, or less given today's conforming 30yr rates.

This is a much more stabilizing scenario than another wave of 5 year adjustibles coming due in 2014 - 2015.

Mar 04 04:03 PM

[nova:]

Russians are desperate. Consequently, they are hungry to sell at any price.

There is a caveat to it: Russians are very unreliable and very often dishonest suppliers.

Mar 04 04:04 PM

[Tom Lindmark:]

Bar Lock,
Thanks for the clarification. I had seen that as well but didn't want to make the article too detailed. I don't think the adjustable rate portion of the plan is all that dangerous. I do think the balloon payment potential with some of the mods could get nasty. Probably just one more thing to forgive down the line.


On Mar 04 04:03 PM Bar Lock wrote:

> A small but important correction to the information provided in the
> article. The HAM program will not be issuing five year adjustbile
> rate loans. They are doing something a bit different.
>
> If the loan interest rate are be lowered to fit the distressed borrower
> into the 31% AGI bracket, the lower interest rate will start adjusting
> in 5 years one percent per year until it reaches the loan rate cap
> which is equal to conforming fixed rates at the time of the modification
> plus or minus .125%
>
> For an interest rate modified down to 2%, after 5 years it will rise
> to 3%, then 4%, then 5%, or less given today's conforming 30yr rates.
>
>
> This is a much more stabilizing scenario than another wave of 5 year
> adjustibles coming due in 2014 - 2015.
>
>
>
>
>
>
>

Mar 04 04:11 PM

[jack59:]

"People who own the capital will stimulate the working class to buy more and more expensive goods, houses and technologies pushing them to rely more and more on credit to the point where their debts will become unsustainable. Debts will not be repaid and it will bring banks to bankruptcy.They will have to be nationalized, the government will have to take the road which will bring it to communism."
Who wrote this and when? It is quite actual these days, don't you think?

Mar 04 04:47 PM

[3 degrees o...:]

jack59 - Karl Marx, Das Kapital, 1867

Mar 04 05:11 PM

[Stockguy456:]

jack59

online.wsj.com/article...

'Atlas Shrugged': From Fiction to Fact in 52 Years

Mar 04 05:45 PM

[longtermstocks:]

Things may get so bad that the fair tax will be in play!

Mar 04 07:25 PM

[MattZN:]

Part of the clear intent of the plan is to try to spread out any actual defaults in time, which would have the positive effect of giving banks a better chance to absorb the losses (1). Another consequence is likely to be a slightly earlier stabilization of home prices, at the cost of a longer period of time before prices begin to appreciate again. If we do see a recovery begin in the next few years (before the 5 year mark) then potentially a larger number of mortgages will be able to avoid default entirely.

It fits well with the rest of the plan. Every knows that it is simply not possible to get instant gratification on things like the stimulus plan. The timing for the various elements of this plan is designed to give the other plans a chance to work.

note(1): The common argument against this is that it turns banks into zombies forever, or something akin to the Japanese lost decade. But given the timing considerations of the plan I don't see this being the case. Everything being done by the government now is designed around a 3-5 year time frame.

-Matt

Mar 04 07:49 PM

[Lin:]

Re

Bar Lock , Tom L

You are correct. This is just kicking the can 5 years down the road when it will blow up again . Wages + employment headed higher in US? You be the judge !

Mar 04 10:48 PM

[k9s-4-k8:]

We all know the arguments about fairness. What about those that payed their mortgage faithfully and yet have to spend their tax dollars on those that bought at the top of the market. But truly, not enough attention has been spent on the unfairness to those that were prudent about not overpaying for a home in an incredibly obvious bubble market. Those that have been renting and saving for that down payment. If we prop up values, they are being cheated out of the opportunity that rightfully belongs to them. What about the next generation? How are they served by the government propping up home values artificially?
If we can rationalize propping up the real estate market for a select group, can't we also rationalize bailout money for renters that see their rent go up? Why should they have to move if homeowners some of whom used 'liar loans' can remain in their homes? And what about my 201K plan? Shouldn't I receive a government cash infusion to recapitalize my stock losses?
The fact is this is an immoral act in a free market economy.

Mar 05 09:24 AM

[PainfullyAware:]

I lament the fact that the Free market was apparently only lip service.

Mar 05 12:38 PM

[JeffVader:]

Wow, if you live/own a 4 unit complex, the outstanding debt limit to qualify for the cram-down is $1.4 million? There doesn't seem to be any limit on the property value.

So if you are a pizza delivery man, and you made a NINJA loan to purchase a 4 unit place, you are gona really make out.
Also, this isn't limited to loans prior to Jan 1, 2009. It just doesn't accept any new loans until 2012. So this is a long term thing.

www.treas.gov/press/re...

I keep hoping I'll wake up from this and find that its all a really bad dream.

Mar 06 02:24 AM