Personal Responsibility Part III: Obama's Mortgage Plan

First, I must refer you to several links in order for you to understand the current situation.  The present picture is not a rosy one with almost exactly 1 in 4 homes underwater (1).   Further, the forecasts for home prices are expected to decline into 2011 and then, likely be flat afterward.

In Part II of this series I outlined the list of contributing factors which led to our current situation.  Citing only one of these as the sole, or even just the main antagonist, would be foolish.  All of them went a long way toward the upside-down positions we are in.  Breaking just one of them would have solved the problem, with the possible exception of #5.

Once again, the government takes the view that in order to make this catastrophe better, we should throw money at the people who made it.  No one would mistake me for a rocket scientist, but folks how much sense does that make?  Giving money to irresponsible people will yield more of the same -- more irresponsibility.  I can see no other realistic view.  Sure, this will help some of the fringe to get out of the pit they are currently in, but those will be far and few between.  I love the politicians who try to support such nonsensical "solutions" by bringing up this tiny fraction.  They display them like trophies and attempt to sell you that this plan was a success.  In reality, the vast majority of dollars went into the abyss, and we the taxpayers, pay for it.

I can think of no better example than GM.  What exactly did loaning them $50 Billion get us? (3)  They filed bankruptcy any way.  Now, we are mired into a future of owning 60% of a bankrupt company.  Their financials are a complete disaster with over $40 billion in negative equity as of 2007 (4).  I can't imagine what it is now as they don't post their financial statements any more.  Perhaps printing it all out on paper would cost too much?  (tongue firmly in cheek).  Now, they say GM 'could be' worth as much as $50 billion.  I think I'll hold my breath now.

Now on to the crux of this blog article:  Obama's mortgage plan.  There are two parts: 
Those who get to refinance their mortgages underwater, and those who need loan "modifications".  The first part, I don't mind too much.  At least those who were stung can refinance given the following criteria (2):

1. The home being refinanced must be your primary residence. 
2. The loan must be secured by Fannie Mae or Freddie Mac.  (appox. 50%-60% of all mortgages)
3. You must be current on your mortgage payments.
4. All loans that are refinanced will be refinanced into 15 or 30 year fixed rate loans.
5. The amount you owe on your first mortgage cannot be  more than 125% (previously 105%) of the value of your home.
6. You also need  a stable income to qualify for a new mortgage.

The only difference between this and normal refinancing is #5.  Banks will not refinance a mortgage loan without equity.  25% is a decent portion of those underwater.  At least its a bone to those who are on the edge and want to be responsible.

The second part is not great, as the government insists on rewarding those who do not deserve being rewarded.  That criteria is here (2):

1. The mortgage in question  must be on your primary residence.
2. The mortgage to be modified must have been originated on or before January 1, 2009.
3. The unpaid principal balance must be equal or less than $729,750 (good heavens!)
4. You can receive $1,000 per year for up to five years.
5. Foreclosures will be suspended while borrowers are being considered for a modification.
6. The program targets a front end debt to income ratio of 31%.  The government will kick in cash to reduce the debt (given to the bank) once the modification gets to 38%.  For example, on a $300,000 loan the government could kick in about $75,000.  No, that's not a misprint.
7. If the borrower has a back end total debt ratio of more than 55% then they are required to speak to a HUD-approved counselor.
8. The modification will last 5 years.  The floor for interest rates is 2% and the cap is the market rate on the day of the modification.
9. No modification fees will be paid by the borrower.
10. Current late fees on the delinquent balances will be waived.
11. Servicers (banks) will be compensated $1,000 for each eligible modification.
12. Servicers will also receive a $1,000 per year Pay for Success fee for up to three years.
13. Lenders or investors will be paid a $1,500 one time incentive for each successful modification.

In summary, the bank gets paid $1,000 for each "eligible" mortgage (even if they do nothing with them) for three years.  They get paid an additional $1,500 for modifying a loan.  The borrower gets $1,000 for five consecutive years if they make their payments on time.  It's unfair, but at least that does have a thimble full of incentive to be responsible.  But of course, I've paid my mortgage on time since inception.  Where's my $5,000?  The true shame here is #6 above.  I estimated based upon someone making $85,000 per year and an original loan of $300,000 and the value of their home being $245,000.  If you do the math and assume taxes are 2.5% and insurance at .75% then to reduce the payment from 38% to 31% would mean the government kicks in $75,000.

While I understand the concepts above are intended to help, all they do is enable.  The neighbor that has paid his mortgage all along gets nothing, except a sizeable loss of his home's equity of likely $50,000 or more.  Rewarding those that created the mess, is the epitome of irresponsible.  When will we learn?



(1)  http://www.huffingtonpost.com/2010/08/06/fannie-mae-home-prices-to_n_672776.html
(2)  http://www.wisebread.com/details-of-obamas-mortgage-plan-released-will-you-benefit
(3)  http://topnews360.tmcnet.com/topics/associated-press/articles/2010/10/31/112860-gm-repay-21b-governments-investment.htm
(4)  http://www.interfluidity.com/v2/86.html