Obama announced the details of his new bailout plan. It's supposedly going to help 4 to 6 million folks avoid foreclosure. The last time we heard that was from the hope for homeowners bailout. That one ended up helping....lets see what was that number again....oh yea, ZERO the last time I checked.
BO's plan has 3 main parts.
Part one is to make refinancing into low interest loans easier. The catch here is you have to have a Fannie or Freddie loan. It allows those lenders to refi the loans with LTVs of up to 105%. If you are more that 5% underwater you're still screwed. I suppose other lenders could do this if they wanted but it would be at their own risk. With the LTV max at 105% this isn't going to help many people in California.
Part two is a bit more confusing. This one is trying to make payments more affordable by getting banks to lower payments down to max 38% of income. This is to be done by lowering interest rates. Then the government would throw in some money to bring those payments down to 31%. It also allows the lenders to reduce pricipal amounts with the treasury sharing some of those losses. This does not apply to speculators or those that maybe fudged the numbers on the loan docs. This one is long and complicated and has a very high likely hood of becoming a total cluster &@*%. I'm not sure how they will tell a speculator investor/flipper from the regular joe that just bought way more than he could afford because he was hoping to cash in 2 years later. Those people are speculators too. Getting the payments to 38% isn't going to be easy in Cali unless those rates go back to 1.5% in many cases. This one just reaks. It still leaves people in homes with mortgages far higher than the value of the home. All this will do is push those foreclosures a few years down the road. This one is going to be a nightmare both for taxpayers and for those homeowners that actually fall for this scheme.
Part three is geared at ensuring low interest rates on new mortages. They are basically allowing Fannie and Freddie to buy more loans in the hopes this encourages lenders to lend, and lend at low rates. I don't see this having much effect. Lenders will lend and they will charge what they want regardless of what Fannie and Freddie buy.
This plan is weak, just like the last ones. It has little hope of working beacuse it does nothing to address the root problem. Housing prices are still too high. No plan will fix that. And what I mean is that to fix it we need NO PLAN. Let the market fix itself.
The plan did have one effect, it stopped the market from tanking today. Although Wall st obviously didn't think that much of it with the market ending up flat.
10 comments:
I think you missed the most important part for the hardest hit parts of the IE. The cram-down provision for BK courts.
If you owe $600K on a $250K house, you will be able to file for BK and have a judge lower your mortgage to $250K (or whatever you can convince the judge that your house is worth). The other $350K will be treated as unsecured debt. Not much help if you have a high income, as the judge will make you pay whatever unsecured debt you can afford. But those are not generally the people showing up for BK court.
I didn't miss it. I just don't think that will work. First of all, there's no where near enough judges to make a dent. Who and how do they determine value? Most home owners are not filing BK. I suppose there is some incentive if a judge can write down a mortgage balance, but I just don't see that going anywhere.
I like the Fannie/Freddie refis and the cramdowns. The "subsidy for mortgage mod" seems really complicated and politicky. It's the banks that have been resisting the mods so IMO any subsidy should go to them. Plus there's a lottery effect here - somebody who qualifies for a rework might have payments go from 48% of income to 31% while somebody in a virtually identical situation might just miss qualification and get nothing. I think they should have offered a subsidy to the bank of 20% of principal reduction plus a Fannie/Freddie style guarantee for modes that met particular criteria (low DTI, maybe makes a year of payments after mod, etc.)
At least this isn't a screaming horror like all the bailouts so far.
I think you may be under-estimating the incentives here.
Previously, if our badly underwater homeowner made $100K, had other unsecured debts of $50K, and owed $600K on his house, the BK judge would eventually let the lender foreclose on the home. BK is a pretty expensive stalling technique ($15-$25K), and BK judges are wise to the ruse (their bull$h!t meters run higher than the average judge).
Now the judges can re-write those mortgages, and tack some portion of the remaining unsecured mortgage to the borrower's payment plan (whatever they deem the debtor can reasonably afford).
Unfortunately, I believe this will become a full employment act for enterprising BK lawyers. "Hey Mr. Homeowner, for as little as $10,000 dollars, we can erase hundreds of thousands of your debt costs! Call NOW!!"
I do know the BK judge's BS meters are better than the average joe. That's one reason I don't think it will work. I don't see many BK judges looking at a guy making $100k/yr that took on a $600k mortgage and rewarding the fool with a write down. BK judges are not idiots nor are they known for their generosity towards debtors. Especially debtors that took on far more debt than the could ever hope to pay.
Now lawyers offering BK deals I can see. I can see the commercials now "Willy Skrewum and Sons got me a $600k house for only $199k"
X, I believe this will fundamentally change the role of the BK judge in an underwater homeowner BK filing.
Their role is to restructure debts that can be restructured. Previously, the primary mortgage was off limits. Now that mortgage is within their purview.
Their job is not to unwind past mistakes, but to confirm a workable plan going forward.
I must be too stupid, I can't find the part of this bailout plan, stimulus plan, pork plan, whatever it is... you know, the common sense part of the plan where you help small businesses, since they react quickly and create jobs swiftly. If you help create good stable jobs, people could afford to buy houses. BO, did I miss that part???
Is there an actual cramdown provision in the plan or just an expression of the support for the idea. Doesn't congress need to change the BK law to allow this ?
All this bailout is ridiculous.
Several years ago, end of 2005, the hubby and I looked at buying and backed away because the payments on a shack were more than we could afford, not that the lenders weren't more than willing to throw the money at us. If we had bought then we'd probably be adding to the statistics and be in foreclosure. Know what I'd be saying if that happened, 'Why was I such an idiot', not 'the government and tax payers should bail me out of my stupidity'.
Now I look at this bailout and wonder why I, as a tax payer, should have to foot the bill for my neighbor's bad judgment.
Six months ago, we bought a house. Hurts a little because values have come down a lot since then, but I can afford my payment without hardship. Just hard to look at the bailout and justify why these people who bought houses they couldn't afford are rewarded with lower interest rates than are available to me.
This bleeding of the system needs to happen. Foreclosures are the unfortunate solution to the problem.
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