Thoughts on the new Homeowner Affordability and Stability Plan
I wanted to share with my readers this opinion from Chris McLaughin on what the Homeowner affordability and stability paln really means to home owners:
So here's the truth of what is really going on...
It is much ado about nothing! Unfortunately our friends in the media know little about the housing crisis that we're living through, but let's start talking about this new "Homeowner Affordability and Stability Plan" that was announced by the President.
They are saying that the plan will enable "up to 4 to 5 million responsible homeowners to refinance." That's true...and a great boom for loan officers and title companies, but let's look a little more at these claims that they will stop foreclosures. It helps folks who right now aren't the ones really struggling...and ignores the folks under water on their mortgage beyond 5%.
Let's read directly from the White Houses' summary:
"Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 - making them ineligible for today's low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% - reducing their annual payments by over $2,300."
Yep, they sure can do that ... but guess what? Most of the folks who will take advantage of this are not the folks that are in foreclosure or currently facing foreclosure! If they have a conventional mortgage with Fannie and Freddie, they aren't the issue right now ... for the most part, the subprime garbage is.
But there's a magic number out there...105%. Yes, that's what we're talking about. If the loan is less than than 105% of its current market value, they might be eligible for refinance. But come on! Most of the people in foreclosure purchased with 100% financing ... you know, the 80/20 loan. Most homes lost at least 15% of value last year, and in California, Nevada, Arizona and Florida, just double that to at least 30%. This plan does nothing for these homeowners.
Now let's think about this further. In order to refinance with Fannie and Freddie, you have to not only have equity in your home (or in this case you can't be under water more than 5%), but you also have the meet the guidelines for a loan refinance. That means you have be employed. You must have a job. NINJA (no income, no job, no assets) loans aren't around anymore. So everyone who just lost their job doesn't qualify for this help.
But is this a good idea, regardless of whether it won't help people facing foreclosure? Yes. If we can reduce mortgage rates that will allow more Americans to have more money in their pockets, which translates to more consumer spending. Frankly I like this idea a lot more than the $400 a year tax credit that will do little to actually help our economy.
Unfortunately, with 80% of distressed properties having a first and second mortgage, modifications for those who were over leveraged is going to be next to impossible unless they've been paying extra payments to bring down their loan balance. So what did Obama signal that he supports?
Cram downs.
What is that?
That's when a bankruptcy court judge steps in and basically modifies loans and cuts its principal. But here's the rub: if you violate the sanctity of contracts, you will add uncertainty to the end investor, which means he's not willing to pay as much for the loan portfolio, which drives up interest rates.
Will cram downs slow short sales?
NO! Come on folks, the reason people do short sales is to save their credit and stop a foreclosure. Do you think those doing short sales want a bankruptcy on their record? No, those are the individuals that don't want to a short sale anyhow ... those are the ones that really want to stay in the home and believe with a modification they can afford it.
What cram downs may do is create an incentive for lenders to approve more short sales and modify more loans. Why? Because they don't necessarily want to roll the dice with a bankruptcy court judge.
But I read that these banks are putting moratoriums on foreclosures? Won't that mean fewer REOs and short sales?
Who owns the majority of loans in trouble? It isn't the banks! It is the investors that purchased these loans. They then hired a servicing company to service that loan on behalf of Collateralized Debt Obligation A23GE63 in Singapore. This is critically important: the majority of homes in foreclosure are not owned by banks, they are owned by investors who bought mortgaged backed securities.
An article in the Wall Street Journal today noted that these investors are now threatening to sue the servicer if they screw up a modification or mishandle a foreclosure. "The securitization has split the interest in the home loan among so many different parties that it is difficult for servicers to make a modification without fear that some significant party may sue or do something else that hurts the servicers," Kurt Eggert, a professor at Chapman University, told the Journal.
So, we've talked about loan refinance and cram downs. What about the modification for those who are in foreclosure? What is that all about?
First, the lender reduces the interest rate on the mortgage to no more than 38% of the borrower's income. (Note: what if they don't have a job...kinda hard to do, huh?)
Second, the government will match dollar for dollar the reduction from 38% to 31% debt to income ratio (government is buying down interest rates, not a bad idea, but the investor has to take the hit getting to 38% which many of them won't do).
Third, lenders must keep the modification in place for 5 years.
In order to incentivize lenders, the government will pay the $1,000 for the initial modification and then will give a $1,000 payment for the next three years if the loan is current.
Then the government will give a carrot to the homeowner of a $1,000 principal reduction for up to $1,000 each year for the next 5 years.
So does this do anything to really stem the foreclosure tide? Unfortunately not really ... because lenders know the nasty statistics that most folks don't want to talk about.
But the New York Times told it to everyone on its front page today. Guess what? Read it for yourself: "The nation's 14 largest banks reported that more than half of the loans they modified last year were delinquent again after just six months, according to the federal bank regulator, the comptroller of the currency."
Yes, after just six months over half of the modifications that were done went back into foreclosure. Why? First of all, a lot of people that never should have been homeowners became homeowners with 100% financing. They aren't ready for the responsibility of owning a home and aren't able to manage their finances accordingly. Second, the economy has a lot of folks wiped out and they've lost their job. And third, after paying for a property that they know is $75,000+ underwater, at some point they just walk from it because it frankly doesn't make economic sense to keep it, especially since their credit is shot already because they've missed so many payments. They can bail out now, rebuild their credit, and buy something again in a few more years (with a short sale they only have to wait 2 years).
So what really happened yesterday? A big mess just got messier. False hope was given to millions of people facing foreclosure that own homes that are never going to get refinanced or modified in a meaningful manner.
