Thursday, March 5, 2009

More Mortgage Mumbo-Jumbo

For Mark Klepper, 40, who lives in Miami, buying a big house was a way to establish credit to start a business. In 2004 he bought a home for $585,000, and watched its value rise to $1.4 million. After refinancing twice, he owes $1,064,000. But the home is now worth a little more than he paid for it, and his income has fallen by 40 percent. He stopped paying his mortgage in January. If he were to continue paying, he said, the drain would crush his business. The government's plan does not help him. 

"I feel if there's a plan out there, there shouldn't be a limit," Mr. Klepper said. "If the government is helping these lenders, they need to take some principal write-downs."

He asked his lender to reduce his balance to $600,000 and his rate to 4 percent, but so far has made no headway.

"I'm saying I can afford to pay, just not what I did in the past," he said. "I wouldn't be asking for it if everything was fine, but it's not."  - New York Times, "Unlucky or Unwise, Some Borrowers Are Left Out," March 4, 2009

How's that for chutzpah?

Of course, then  you have Chadi Moussa who lives in a house for which he owes almost two million dollars to the bank. Unfortunately for Moussa, his home is valued at about one million. Mr. Moussa is irritated with the federal government because the "rescue package" disallows his situation. His mortgage is too high and it's not backed by Fannie and Freddie. Mr. Moussa said, "You give $25 billion to a bank, at least they should help people stay in their homes. But once you get to big loans, nobody's doing anything about it." 

There's so much that bothers me about the mortgage rescue plan that I don't even know where to start, really. According to administration officials, this plan is intended to help as many people as possible and "could prevent three million to four million foreclosures." But the plan will not help people who have seen a significant reduction in their income, making them unable to pay their mortgage. Nor will it help people who are upside down in their mortgage. Ahem... pray tell, whom are we helping, exactly? 

Can somebody please tell me why there are people who are "at risk" of foreclosure who owe 80% or less of the current value of their home, and haven't experienced a significant reduction in their pay? Pray tell, what circumstances have caused them to default on their mortgages? Are we currently experiencing, along with the economic turmoil, a plague making people in droves default on their mortgages due to unforeseen medical expenses?

According to the New York Times article mentioned above, "The planners expect 20 percent to 30 percent of people who receive modifications to default again..." Whoa... so we're modifying loans for people who have defaulted in spite of the fact that they haven't had a significant reduction in their income... and we're expecting a large number of them to default again anyway? What kind of insanity is this? But J.P. Morgan is estimating that the loan modification plan will prevent from 600,000 to 2.6 million foreclosures. First of all, that's quite a span. Secondly, how can you know? Of course, the administration is estimating a much higher number... 4 million. I guess -- reach for the sky. Nobody can prove you wrong if you say you "saved" that many people. Since all you're claiming to have done was prevent something that hadn't happened yet anyway, it's pretty hard to prove you wrong. Kind of like having sex, running around your house fifty times -- then claiming that this is what saved you from becoming pregnant.

Another issue I have with this plan: there is no ceiling on how high their income can be as long as they are "in danger" of losing their homes. Some people could see their interest rates drop to as low as 2 percent. I suppose we can then call those people "winners in life's lottery?" I mean, really... it seems like what we're talking about here is a person who has a pretty nice pad (mortgages up to over $700,000?) and isn't very good handling their money. Clearly, they have a decent income if they qualified for a mortgage that high even in the most liquid of lending times.  But for some reason, despite their decent income, they have defaulted on their mortgage at least once. Late payments, maybe. Something to alert the mortgage company that this person is a foreclosure "risk." So this person can go to the mortgage company and request that they change the terms of their loan... maybe from a reasonable 6% interest rate to a 2% rate. Hooo-ee!! Congratulations! You've won an increase in spendable income -- off the backs of the American taxpayer. 

Another aspect of this whole thing that bothers me is Timothy Geithner and his inability to make sense. He says, "It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets." Excuse me, Mr. Geithner? Isn't the "damaging spiral" going to effectively make housing more affordable? Really, the lower the price of homes goes, the more affordable owning one's own home becomes. But... how can you have both? Either you want things to become more "affordable," or you want to stop the downward spiral and ensure that people keep the value they currently have. That fiddle can't play both tunes at the same time.

So here's how our taxpayer dollars are helping in the loan "modification" program. The Treasury will give mortgage servicing companies an upfront payment of $1000 for each loan they modify. Oops. Make that "the taxpayer" will give them $1000. Then, the taxpayer will be fronting the company an additional $1000 each year for the first three years - but only if the borrower remains current. On top of this, we taxpayers will be chipping in $1000 per year to reduce the borrower's loan amount if they stay up to date on their payments. But that's not all, folks!! We, the taxpayer, are also going to match, dollar for dollar, the lender's cost in reducing a borrower's monthly housing payment from 38 percent of the household's gross monthly income to 31 percent.

Do you want to know how they'll decide if you've won this particular lottery? The lender will calculate how much it would cost to reduce your monthly payments to an "affordable" range. If the calculation shows that the lender's cost in modifying the loan (after receiving our taxpayer subsidy) is lower than the cost of foreclosing -- YOU WIN!! As in, the bank is required to do this for you.  If the concessions by the bank look higher in cost than foreclosure, then the bank can decide if it wants to help you or not. And don't worry!! The lender is prohibited from charging you any fees to modify your loan. Those fees, and then some, are being charged to us - the American taxpayer. 

Do you think this frosts me a little bit? 

Of course, this program is only for people who are living in their home full time. You cannot ask the bank to modify the mortgage on your second or third home. Well, darn... but you can request modification on your mortgage if you purchased the home and signed on December 31st of 2008. Pretty cool, really, to be able to refinance at great savings on your interest rate, get the taxpayer to pay $1000 a year on  your loan just for staying current on your own mortgage, and not pay any closing costs on the new loan. 

Rock on, America!!

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