Thursday, February 19, 2009

Foreclosure Plan Reactions

Even more prevalent than articles about the foreclosure plan are the reactions to it. First we will take a look at our favorite bloggers. From Calculated Risk's post Comments on Housing Plan -

[ Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices] is fine, although it is kind of like winning the lottery. If a loan was sold to Fannie or Freddie (or guaranteed by them), then the homeowner has the ability to refinance with a higher LTV - but if the lender decided to keep the loan (not guaranteed by Fannie or Freddie) or sold the loan to Wall Street to be securitized (not by Fannie/Freddie), then the homeowner is not included.

This program is fine for Fannie and Freddie - they are lowering their default risk. And this is obvious good for the borrower. The new maximum LTV will be 105%, so this will help some homeowners who are "underwater". This is for refinancing only.

For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.

This is not so good. The Obama administration doesn't understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key

[S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.

This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.

Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

We totally agree with Calculated Risk. Out take on the program was exactly the same. Probably anyone who took a Pick-A-Payment and did not or could not pay anything other than the lowest payment should be left out of the program. Also anyone who received 100% financing or more should also be left out. This group was speculative whether that was their intent or not.

Now onto Mish's Global Economic Forum post titled Obama commits $275 Billion to Slow Foreclosures -

I do not buy this "acted responsibly" nonsense. If a person took out a loan greater than 38% of their income they most assuredly did not act responsibly.

Furthermore, the Obama plan increases the size of Fannie and Freddie, rewards servicers for no reason, giving them an incentive actually to waste taxpayer money, and rewards those who acted irresponsibly. Is this a good thing?


One question I have was not answered by either article. I am very concerned for the borrower's sake about loan modifications turning non-recourse loans into recourse loans.

How many people will become unwitting interest slaves for the rest of their lives by signing up for one of these "loan modifications"? That is likely to happen if non-recourse loans become recourse loans.

Wow - a twofer! We agree with Mish that those who are paying too high of a percentage of their income should be left out of the program. We recommended that anything higher than 45% should be left out of the program. Perhaps some of these people were making large incomes during the bubble days - like brokers, realtors, builders and contractors - but those incomes are also inflated due to the bubble.

Now onto an article from the Philadelphia Inquirer in an article titled Industry reaction to Obama plan lukewarm -

"Doing nothing is not an option," said Philadelphia economist Kevin Gillen. "But doing anything and everything isn't necessarily better than doing nothing."


"We can all debate the fairness of this, but ultimately, we have to stabilize the housing market, and this is one part of the process," said [TD Bank N.A. chief economist Joel L.] Naroff, who is based in Cherry Hill.


[Philadelphia mortgage broker Fred] Glick cannot see incentivizing bad behavior by riding to the rescue of the people who caused the problems: bankers who made bad loans, and borrowers who borrowed more than they could afford.


If the program targets homeowners whose mortgages now exceed the value of their houses - referred to as "under water" - "then simply let Fannie Mae and Freddie Mac refinance these loans without requiring an appraisal," Glick said.


[Bruce M. Sattin, a Lawrenceville, N.J., lawyer, said] a positive step Obama's willingness to change the law to permit bankruptcy judges to modify home loans.


Economist Gillen maintains that both mortgages and the homes that securitize them must be marked to market, meaning "that the values of both need to drop, but not by too much."

Second, the government needs to distinguish between deserving households and undeserving households, not just between flippers and primary buyers.

That is the big issue - that the people whose lenders sold their mortgages to Freddie and Fannie will have an advantage over those whose lenders held their mortgages or sold them to someone else. There are alot of areas where fairness is completely out of the picture. Perhaps that is the best part of the "do nothing" option is that fairness is applied equally to all! But the do nothing option will bring alot of negatives with it that would be much more detrimental than the do nothing option.

Now onto the politicians responses which the USA compiled in a sidebar titled Reactions To Obama's Housing Rescue Plan -

"This plan will start to rebuild the communities hurt by foreclosures because we all have a stake in curing this epidemic."
-- Senate Majority Leader Harry Reid, D-Nev.

"The Obama Administration gets it foreclosure prevention not only provides relief to middle class families struggling to make ends meet, but also is critical to getting our economy back on track."
-- Sen. Chris Dodd, D-Conn., chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

"The President's plan appears to help those who least need it, and doesn't help those that do."
-- Sen. Richard Shelby, R-Ala., the top Republican on the Senate Committee on Banking, Housing, and Urban Affairs.

"I applaud the president for his commitment to help keep American families in their homes. However, I strongly urge him to ensure that borrowers and lenders who made bad decisions are not rewarded at the expense of the more than 90% of working-class American families that are still making their mortgage payments without government assistance."
-- Rep. Spencer Bachus, R-Ala., the top Republican on the House Financial Services Committee.

Shocking - D's support the plan and the R's do not. But good for Rep. Bachus to support keeping people in their homes and warn about helping people that should not be helped.

As we pointed out in previous posts - there will always be some level of foreclosures due to job losses, death, medical issues, etc. However the epidemic foreclosure wave due to bad lending practices are beyond the normal scope and unfortunately they are also hurting the 90% who are paying the mortgages. Plus do not forget the forgotten victims of foreclosure - renters.


Anonymous said...

I inherited a home with a reverse mortgage, which was my fathers. I cannot get a mortgage to buy the home out right and I cannot find any laws on reverse mortgage homeowners. The home is now worth less than is owed.

NJHH said...

Wow - what a hard predicament. What state are you in? Also find if your property is HECM - part of the FHA mortgage program. If it is not you will have to read through the contract and try out figure out what your father agreed to.

Perhaps some local non profit housing organization or the NACA can help you sort through the document as well as the state laws.

Anonymous said...

I am in NJ. He agreed that the house be sold to one of his heirs or the house be sold and any funds left over should be divided by his heirs. However, with the present housing situation, we would now have to borrow more than the house is worth to pay it off. It is a HECM loan and is backed by fannie may. Thank you for the advice of a non profit helping me, I will look into that.

NJHH said...

Good luck Anon. It is a difficult time right now. We regularly warn about Reverse Mortgages but that is where the money is right now. With the higher commissions that come up front the brokers have every incentive to make them sound as great as possible.

Since it is Fannie there hopefully you can negotiate something to keep the property.

Some other Garden State solutions could be contacting the foreclosure prevention program here -

Or you can try this free foreclosure prevention program March 21st will be held from 9 a.m. to noon in Bergen. If you are not to far, you can call the Bergen County Homeownership Center at (201) 336-7200 to register.

While they may not be the perfect solution for you, either group could possibly give you more specific guidelines.

Good luck and please keep us posted.