Obama Mortgage Plan Unlikely To Help Most
Oct 25th, 2011 | 7 responses
President Obama today announced an expansion of the program to help homeowners who need to modify their mortgage.
Specifically the program will now allow those who are significantly underwater on their loans to qualify for the program. Previously the program only allowed those who were within 25% of value to participate. This left many out in the cold in states like Florida, Arizona, Nevada and California because the market there dropped more than 50%.
Certainly this is a helpful step and one that will aid many people in trouble. While we can debate the merits of helping those who to some degree are to blame for their own problems, the idea of stabalizing the housing market is a good one.
The problem is that I do not think the program will really do that much to stabalize the market or to help many of the homeowners. I have had a lot of input from bankruptcy clients on the current program and base my view largely on that input.
For one thing, the program has very strict income rules. Basically you have to fit into a very narrow window of making enough money to be able to pay the new loan but not enough money to pay your currentt loan.
Needless to say few qualify for this. In addition they cannot be behind on the loan and must also meet a number of other conditions which tends to eliminate even more people from qualifying.
In addition, the program does not change the balance of the loans and consequently people are still being asked to pay $ 400k for a $ 200k house. I do understand those who would like to see this change but if we did change the loans this would simply open up a new set of problems (I’ll get into that in a future post).
Because the only thing being changed is the interest rate and perhaps the term, the result is a fairly small change in the monthly payment. People paying $ 2,000 being told they can now pay $ 1,950 won’t exactly be thrilled. Even if they manage to get the claimed $ 200 drop it still won’t help much.]
In truth I think this is the quest for a solution that does not exist. There are ways to fix the home mortgage market but the real solutions (such as reducing balances) would have such a negative impact on the rest of the economy they aren’t worth trying.
7 Responses to “Obama Mortgage Plan Unlikely To Help Most”
This is the real problem. There is still a lot of bank-related drag on this economy, and wiping out these debts would likely instigate another banking crisis. Remember debts are actually assets to a bank, and wiping them out would again weaken banks. And with the Euro ready to collapse, a weakened banking system is not a good idea.
Of course, we could have the government back-fill the banks by funding the bailout of homeowners, but we can’t afford that, either. We are broke, our debt is overwhelming, and we’re unwilling to properly fund what we want through taxation, so the only way to do it is through inflation, which would be horrible. Plus having the government prop up housing would be a form of price control, and history shows us how harmful that is.
This housing crisis is a terrible mess, I don’t know if a good way out of it even exists, but I’m convinced buying up bad mortgages is not the way to fix it.
Patrick,
This is the first I’m hearing of the income requirement. Do you have more details on it?
Of course, without an income requirement, the government (aka the taxpayers) would lose quite a lot of money on the program so it makes sense to have one, I just haven’t seen it.
The only quibble I’d have is that I think you’ve understated the savings for many/most who actually do qualify.
A 30-year fixed $300,000 loan at 6 percent gets you to about your $2000 per month. That qualifies for Fannie/Freddie and is in the range of an interest rate people might pay. If you take that down to 4.25 percent (slightly above current rates), the cost is about $450 per month less, a pretty substantial savings.
From what I understand, the Obama administration in getting to the $200 number is also aiming for a reduction in term (to 20 years) which makes absolutely no sense to me.
(from the link)
Perry bought a condominium in Santa Monica in 2005, near the height of the market, and rented it out after he couldn’t sell it. Its value has dropped about 6%, he said. He owns a larger home in Tarzana for his growing family, and its value has plunged nearly 20%.
The link gives this as an illustration as the the type of homeowner the program would help, but it actually looks like the type we wouldn’t want to help – a guy with two properties, one of which it looks like he bought to try and flip.
Steve:
First off let me apologize in advance for the fact that information on the programs is conflicting since there are several.
But the basic rule is you have to have a mortgage payment that is greater than 31% of your income, otherwise they assume you can afford the payment.
Absent other major debt this is usually true but most people with mortgage issues also have other debt issues.
At the same time if your proposed mortgage payment is going to be much over that same 31% then you probably are not going to qualify because they assume you can’t afford it.
When speaking to clients I use the analogy of what we all learned in science class. If the Earth was a bit closer to the sun or a bit futher away we’d all die.
By the same token, your income has to fit a fairly narrow window to qualify.
As to the change in payment, I do agree that the math, in theory, would provide a bigger change but in practice almost all of the changes I’ve seen and that friends/colleagues in law or real estate have seen very small changes.
And of course the banks have the option to say no and in many cases do. Their theory seems to be better to get the insurance/government payout now for a default that wait 20 yrs and hope all the payments are made.
Although I do have something of a conflict of interest in that the success of the program could reduce my work, I do hope that it helps a lot of people. But given the track record so far I am not hopeful.
The collapse of the bubble has broken the illusions that kept people buying inspite of prices. You can either allow the housing market to stagnate until such time that market demand grows to meet the prices you have pushed it up toward, or you can allow them to drop to a level where people begin to buy and let the market pick up right away. “Stabilizing” the market is just a prescription for long term doldrums.
There is also the idea that those who are “underwater” are people in economic difficulty who need help. Lets remember that “underwater” just means “loosing money on an investment. Someone who leveraged multiple subprime mortgages to try and make as much money as possible (and can still afford to live someplace nice) can “underwater” while someone who bought before the bubble, but has lost their job and can’t make payments, is not “underwater”. Concern over those who are under water doesn’t mean concern over those in need, but it does mean concern over those who made bad, or even risky, investments.
If you subsidize bad behavior, you will get more bad behavior. If you subsidize those who contributed to the housing bubble, you will get more people contributing to the next bubble.
No kidding?
With a title like this I guess mentioning the fact that if one homeowner gets some help from this it’s better than anything the lower house (Republicans Majority) or the upper house (Republican filibuster) have done.
And that, I think, is the point… Try to shame the Republicans into doing something for Middle America.
When shaming them fails, and it will fail, they’re Republicans… they have no shame) at least the American PEOPLE will see who is trying to help and who isn’t.
EDIT TO ADD: The Republican I refer to that “have no shame” are the elected politicians in Washington. I know that there are many Republicans that understand / experience shame… Several are friends and they’re very ashamed of how their party is acting.
Well Steve I would point out the current plan (both the old version and new one) are Obama’s plan. AFAIK He never asked for or intended for a more expansive plan (even when Dems ran the whole show), largely for the reasons discussed here, that there is no real solution.
Unless you want to propose one (short of give everyone 200,000 to catch up).
It does stink but it is really a problem without a viable solution.