Economy, Editorial, Market Conditions, Mortgage, REALonomics
Biting the Hand that Wants to Feed Us
February 20, 2009 by REALonomics · 1 Comment
flickr image by revdancatt
President Obama flew into Arizona to announce his blueprint for a $75,000,000,000 mortgage bailout known as the “Homeowner Affordability and Stability Plan.”
REALonomics has digested the preliminary outline of this program which claims to “…offer assistance to as many as to 9 million homeowners…” through a combination of loan modifications and propping up of Fannie Mae and Freddie Mac, support for state housing authorities and financial incentives for lenders to re-tool existing loans for a predefined set of homeowners whose mortgages fall into specific qualifying categories.
How does it Work and who are the Beneficiaries?
Will the President’s plan make a difference and if so, to whom and when? And, is the plan a sound economic model that will actually help homeowners facing foreclosure, as claimed by the administration? Is this another step in the direction of creating a dependency upon the federal government for and on the part of some Americans and lending institutions?
Let’s take a look at the plan and ask some hard questions.
The plan, set to kick into gear on March 4, 2009, uses carefully calculated qualifying formulas based upon principal mortgage balance ceilings, rigid LTV ratios and market value reductions. The result is yes, some homeowners will be assisted. If you own property in California where 60% of the mortgages exceed $417,000, you will not qualify.
At this point, it looks as if those with higher end home values and jumbo or super jumbo loans are not going to be granted any relief. Only first position mortgages qualify. If you have a second, its only value is to help justify a reduction of the first based upon its contribution to your debt to income ratio.
DOWNLOAD THE EXAMPLE DOCUMENT HERE.
What’s the Financial Carrot for the Lenders?
The plan states that “Treasury will partner with the financial institutions to reduce homeowners’ monthly mortgage payments.” In effect, the taxpayer will be matching the reductions lenders approve on a “dollar-for-dollar” basis to a write down to a 31% debt-to-income ratio for borrowers and lenders will be required to keep the modifications in place for five years.
We will all be funding cash payments to the lenders to pull off the Obama plan. Lenders will receive up-front fees in the amount of $1,000 for each eligible modification. Lenders will also receive bonus payments monthly as long as the borrower stays current on the loan. Are you in favor of such support to lenders?
There’s more! Lenders will be given $1,500 for taking action with those homeowners who are NOT in default or behind in payments and an additional $500 for servicers for modification made while a borrower at risk of imminent default is still current. Is this something you like?
Still more! The government (taxpayers) will also pay up to $1,000 each year against principle balances on loans where the borrower is current on their mortgage payments. This takes place each year the borrower is current for up to 5 years. How does this sound to you?
Are we actually creating a new hybrid sub-prime mortgage product that is simply financed by taxpayers with newly printed money backed by loans from foreign banks?
DOWNLOAD THE PROGRAM FACT SHEET.
Are the Capital Market Supporting Obama’s Plan?
In short, the financial markets have already started to reject the plan with CitiGroup stock dropping to less than $2 and Bank of America plummeting on fears of nationalization of their enterprises and indeed the government control of the financial backbone of the American economy.
Since the federal government started tinkering with banks, throwing our TARP money, setting forth plans to retool mortgages and delivering so-called bailout plans, the stock market has plunged to pre 2002 levels with historic losses, indicating a continued lack of confidence on the part of investors in federal bailout programs.
Another interesting question those of us in the real estate industry should be asking is whether or not this plan will actually stop the reduction of home values, open the credit markets for new sales and stop foreclosures?
What would happen if we just left the market alone? We are already seeing banks stepping up to the plate to solve the problem without taxpayer support.
Do we want our industry’s future to be predicated on total control of the lending and qualifying process, government determination of property values and a segmentation of homeowners into various classes and categories based on home values? Or, do we have more confidence in the free market to work its way through this problem.
REALonomics believes we have only seen the beginning of the creation of a “Nanny State” that may result in more damage to the economy. To top it all off, the CEO of Bank of America has been subpoena in an attempt to force disclosure of bonuses paid to bank executives prior to BofA receiving TARP funds.
Are we thinking long term? Should we back off and let the markets self-correct? Are we willing to take on massive personal obligations for government backed mortgage solutions? How will the “Homeowner Affordability and Stability Plan” impact our children and grandchildren?
DOWNLOAD THE 14 QUESTION FAQ DOCUMENT.
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Asking hard questions is a good thing. The way these “hard questions” are framed, however, do not invite objective, unbiased answers or provoke further inquiry on the part of those being asked. Of course we (the taxpayors) do not want to reward bad lender behavior! We often have to indirectly help the less than deserving to help those truly in need and well deserving, take for example, welfare for children.
The primary intent of this Plan is to provide financial assistance to homeowners who find themselves in financial trouble not just because of predatory lenders or bad or irresponsible borrowing decisions. In fact, not all lenders have been bad. The incentives offered by the Plan is to encourage lenders to do things they might not otherwise be willing to do to assist the troubled homeowner and the housing industry. We’ve already seen what happened with a hands-off policy, which gives me no confidence that the market will right itself if left alone, not without taking down a lot of innocent homeowners, wage earners, investors, and companies along the way. Am I confident this Plan will accomplish what its intends to do or that it will do so within any reasonable period of time? Not necessarily, but I’m willing to give it a chance.
I believe the majority of taxpayors agree something had to be done, despite the fact the reaction of the financial markets may indicate to the contrary. The run on the stock market and financial institutions has been more a knee-jerk, Chicken Little, reaction by investors not willing to take the time to either let the market correct itself or to give the Plan time to see if it will work. How reliable of an indicator is the stock market when it can loose 400 points one day and gain that much or more or most of it back the next day, with this pattern continually being repeated over the past several months?
I will happily inform my current and past clients, friends and family of this Plan and encourage them to take advantage of it if they need it. I will support it and do what I can to ensure it accomplishes its intended goals. But should we stop paying attention and asking hard questions? Of course, not.