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.