President Obama has unveiled his program to save our homes. The focus of the program is to stabilize home values, thus stabilizing the value of mortgages based on those homes, thus stabilizing the mortgage based securities. Whew, sounds like a complex, round-about route to doing what I have been demanding in my articles. I suggested simply revaluing mortgages to "maturity" values, instead of the "market."
But the Obama housing plan does have popular appeal. It is being sold by talking about saving your home, instead of such exotica as stabilizing values of mortgage based securities. It should sell well.
As for the details, there are parts that will work and parts that could be disastrous. First, the workable parts. Under the plan Uncle Sam will pump up to $400billion in new funds into Fannie Mae and Freddie Mac, the two mortgage giants that house over half the mortgages in the USA. Uncle Sam now owns these two outfits. This is almost a no-brainer, put more money into the two mortgage giants and mortgages will be more readily available. This program will do much to help.
I also like the provisions to forestall foreclosures. Several actions designed to do this have already been adopted by the government and private lenders in the last year. The Feds will do well to increase this effort by providing funds to make them work.
I have problems with the plan to combine public and private funds to lower the payment on mortgages not in danger of foreclosure. The intention is to help people with "underwater, upside down, or negative equity" situations, i.e. the house is worth less than the mortgage on the house. The plan calls for bringing the payment to less than 31% of the home owner's income. Not hard to see where this came from, that was the FHA rule used by mortgage brokers to give the loan in the first place, be it an FHA loan or otherwise. Of course this will help those who have seen their income go down or their mortgage payment go up smartly. But the vast majority of loans have not seen their cost go up and home owners, by and large, still see the same income.
The real problem with this measure is that it allows for substantial fraud. We all saw fraud in issuing mortgages. The fraud typically came in determining what constitutes 31% of a home owner's income. The fraud in issuing the loan involved including "phantom" income. The fraud in this new case will involve excluding unreported income. The way it will happen is that the mortgage broker will tell his client to hide income that does not show up in public records. Anyone in the middle of doing his taxes knows about this. If you need advice, just ask former Senator Daschle.
The next problem with this also comes from the complexity of melding public and private funds. The private lender will try to maximize the Feds payment for any loss due to bringing the loan payment to the magic 31% limit. Redoing one of these loans will take very skilled operators and there are very few of these. I can see mountains of complaints and infractions of law in this process.
As bad as this proposal may become, it pales in comparison with the idea of allowing mortgage balances to be decreased to the present value of a home. Again, a mortgage is not property. This could open a Pandora's Box of every mortgage holder trying to dump part of what he owes. The way it would work is to allow judges to decide that mortgage balances excess to home values are "unsecured" debt. Ridiculous. Mortgages are backed by promissory notes that say the borrower pledges all his resources to paying the debt, not just the collateral property. A very dangerous move.
While I have problems with some of the program, in sum this could be a good PR program. "Save our homes" has a good ring to it. But as I have said all along, ending foreclosures will not correct the mess, since the foreclosure rate is not really high, about 3%. It may help the individual home owner, but it is too uncertain and too late to correct the credit freeze. It could also cause even larger problems.
Leo Cecchini
February, 2009
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The government should try to prevent homeowners from walking away from their properties due to the fact they are underwater.
I suggest the government look at doubling or more, the tax deductions associated with underwater property. This will provide some stability to the housing market, and in theory keep homeowners in their homes due to the related tax benefits.
Three families just moved out of their homes in my neighborhood by declaring bankruptcy and then turning the keys to their homes over to the bank. They were current in their mortgage payments! They didn't need to do this, but it made economic sense as these people can now use their funds for their retirement in lieu of funding a worthless property.
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