I’m not sure I have the strength to be stabby anymore, but I’ll give it a go with this year’s housing rescue plan. I say this year’s, because last year we saw the Barney Frank plan and apparently a whopping 35 households have taken advantage of it. That’s right, 35. So now we have this new plan, and it puts cash on the table for lenders. We’ll see if that works. First, let me start with something that wasn’t mentioned in the plan that really does make me stabby:
Last week, Fannie and Freddie announced new fees that could grind the housing market to a total halt. They would slap qualified borrowers with high credit scores with an additional 1.5%-3.5% fee just for buying a condo. They would also slap anyone with a credit score under 740 with extra fees if they couldn’t come up with 25-30% down. 30%! These new policies and fees will only make the home buying market worse by penalizing people who are actually qualified to buy a home right now. Fannie and Freddie screwed up. We all know that. But they can’t make up for past failures by penalizing future borrowers! I’ve already written to my Senators. If you plan to buy or sell a home anytime soon, I suggest you do the same.
Housing Rescue Plan Components
This year’s plan (or maybe I should say this month’s) includes a few key elements:
Refinancing.
Borrowers who are underwater will be able to refinance to a rate around 5.16% through this program if they have Fannie and Freddie conforming loans. This will reduce their monthly payments, which will hopefully allow them to keep their homes.
Loan Modification.
Another portion of the program targets borrowers who are underwater or have high mortgage payment to income ratios. This plan will help those in default or and those who haven’t yet defaulted. It will reduce interest rates and payments down to as low as 31% of income, with government support. The rate is locked for five years, at which time it can step back up to the conforming rate at the time the loan was issued.
Lender Incentives.
In addition to government supports, loan servicers and issuers will receive cash bonuses for modifying loans.
Borrower Incentives.
Borrowers will also receive mortgage balance reductions of up to $1,000 per year for each of five years they remain current on the loan.
Borrower Counseling.
Borrowers with a 55% or higher debt-to-income ratio will be required to receive credit counseling as part of their participation in the program. I like this part.
Guidelines.
There will be standardized loan modification guidelines that will clearly spell out the process and qualifications. Imagine that – guidelines!
Bankruptcy Modifications.
In certain cases, a bankruptcy judge will be able to treat the difference between the home’s current value and the loan amount as unsecured debt. In some cases, that may allow the judge to eliminate that portion of the debt.
My Thoughts
I have a few thoughts. First, I guess they had to do something, but I’m not sure this will really be effective. If I have a loan for $300,000 and my home is now worth $200,000, what’s my motivation to keep paying even if the interest rate is low? Some people expect to live in their homes forever and will keep paying on the theory that the home will be worth that much eventually. Other people would rather start over a few years from now with a different home and a different loan.
Second, lenders should have started modifying interest rates a long time ago. It shouldn’t take cash incentives to get them to do the right thing. It disgusts me that we’re basically bribing them to modify a loan so they can continue to be paid rather than force a foreclosure.
Third, I’m not thrilled about the bankruptcy portion, for three reasons. 1. If a family can’t afford the payments even after the loan modification, then they probably shouldn’t be in that home at all. 2. What happens when home prices do eventually improve and the home is worth the value of that original mortgage? Who gets to keep the gain that otherwise wouldn’t have existed? 3. If judges can just wipe out a portion of a mortgage whenever home prices drop, what’s the motivation for lenders to issue loans? We have no way of knowing when disaster or a local recession may strike and decimate home values (such as the 1990s base closures).
What do you think of the new housing plan? Do you think it will work? What do you think of the new Fannie and Freddie fees?
