patrick.net

Still outrageous!

They're still drowning, but now you've handed them a government pamphlet that says "How to Deal with Drowning" complete with helpful illustrations by third graders.

I want me some!

thomhall says

How are you going to keep people in their homes when they are under water? Let them refi the underwater house!

That's not nearly as bad as you make it sound.

Most people plan on staying in their homes, and keeping people in their homes is good for society as a whole (strong, established communities, stable schools, etc.)

If someone is stretched and you can lower their payment by enough to convince them not to walk away, you're helping the economy:

1. The owner has more spare cash to save or buy stuff with.
2. The bank doesn't have another foreclosure on their hands.
3. Consumer confidence is lifted, which is really the biggest key to the overall health of the economy.

Now, I'm skeptical that these modifications will actually make any difference in the long run, but they might. If you can reduce the interest rate by at least 1 percentage point, you may very well be making the difference between staying and walking for many owners.

It sounds like they're trying keep prices artificially high and create another mini bubble.

Er, yeah. I don't see how prolonging a bad situation even by a little makes it better for anyone in the broader picture. If the government really wants to stanch the bleeding, I think it could be done more effectively by establishing a program where Uncle Sam acts as guarantor in lease agreements for people who have foreclosed and have wrecked credit -- that way they can rent without any hassle until their credit rating improves.

I'm not sure I see how consumer confidence would be lifted. That's a stretch. Besides, consumer confidence isn't what is paramount in the economy, it's employment and savings rates.

Anybody understand how this program works?

I know someone that has an underwater loan from the bank and they would like to refinance at a lower rate but the bank will not allow it due to the drop in the appraised price of the house.

How would this person take advantage of this program?

StillLooking says

Anybody understand how this program works?
I know someone that has an underwater loan from the bank and they would like to refinance at a lower rate but the bank will not allow it due to the drop in the appraised price of the house.
How would this person take advantage of this program?

You just call around. The thing they do not tell you in any of the media is that anything over 80% LTV "program" or no "program" is priced at a much higher rate than the advertised low rates. Those rates are for people with verifiable income, high credit scores, AND 80% LTV. When I called BAC about my loan and a 105% LTV refi (when advertised loans were sub 5%) the loan they would give me was minimum 6%. My current is a 5.375% 30/fixed. The loan officer said I will never beat that rate without paying down my principle to 80% LTV.

Unless the government starts a program with guaranteed low interest rates for anybody with a pulse, this program will FAIL.

Austinhousingbubble says

Er, yeah. I don’t see how prolonging a bad situation even by a little makes it better for anyone in the broader picture.

Well not every person a small amount underwater should walk, so I do think that in some cases allowing people to refi into fixed loans will help people. I am probably 20% underwater now (after having 50% equity at one point). I have a fixed rate loan, and my PITI is about what I would pay to rent a SFH in my area. The difference is, I am paying principle and have a tax write off, and eventually I will own this house. I also have the freedom to have my dogs, my home is in good shape and comfortable, and I like my neighbors. I can certainly see someone in my situation who has an adjustable rate want to (and benefit from) being able to get a low fixed rate and hunker down.

Tude,

Why should we the taxpayers subsidize anyone in your position, but who had an adjustable rate? Sounds like they are just fine. Even with the rate adjusting up it won't be that much more expensive than rent. So these people wouldn't default in the first place, so why exactly should my tax dollars go to them?

sfbubblebuyer says

Tude,
Why should we the taxpayers subsidize anyone in your position, but who had an adjustable rate? Sounds like they are just fine. Even with the rate adjusting up it won’t be that much more expensive than rent. So these people wouldn’t default in the first place, so why exactly should my tax dollars go to them?

And how are your tax dollars "going to" them any more than any F/F mortgage?

I am MUCH more concerned with all these tax credits for buyers getting more people into homes they cannot afford than allowing someone with good credit and verifiable income to refi their underwater mortgage into a fixed rate.

If the government is guaranteeing the loans through Fannie Mae it is USA dollars that are financing the loans.

This means that when all these loans that Fannie Mae and Freddie Mac are now buying go south, the value of the USA dollar will go south with them. This also means that these loans directly make buying anything at the grocery store more expensive since the loans hurt the value of the dollar.

The housing bust should have caused deflation meaning that everyone's cost for food and groceries and the needs of life should have been dropping. Instead all these government bailouts are keeping prices higher so anyone that is not getting bailed out is subsidizing those that do get government handouts and they are paying the subsidy at the grocery store.

StillLooking says

If the government is guaranteeing the loans through Fannie Mae it is USA dollars that are financing the loans.
This means that when all these loans that Fannie Mae and Freddie Mac are now buying go south, the value of the USA dollar will go south with them. This also means that these loans directly make buying anything at the grocery store more expensive since the loans hurt the value of the dollar.
The housing bust should have caused deflation meaning that everyone’s cost for food and groceries and the needs of life should have been dropping. Instead all these government bailouts are keeping prices higher so anyone that is not getting bailed out is subsidizing those that do get government handouts and they are paying the subsidy at the grocery store.

This still does not answer why this is any different than having ANY loans guaranteed by F/F. As I see it, knowing that the income and credit restrictions are pretty stringent to get these loans, in this particular instance it's still better for all involved to let the person just refinance.

I am at about 125% LTV right now, have a Freddie guaranteed loan, and have no intention of walking away from my house. Would it be better for me to walk or be foreclosed on? That makes no sense.

Tude, I think Freddie and Fannie should be put down immediately. I won't argue with you there. I just think the 'expanding the cap to 125%' is dumb. But then, I think the original plan is dumb.

I'm convinced the whole point of everything they're doing is to keep the crash slow enough to not collapse the financial system. They have to know by now housing is not coming back. But if housing corrected 50% over night, the massive defaults in such a short time really would destroy the banking industry beyond recovery.

So they want to draw it out, but unfortunately they seem to want to do it in such a way as to grow the moral hazards of 'too big to fail'.

So even though the house is worth 75% of the loan, the government should allow a person to refinance and then back that loan? Isn't the government essentially getting 75 cents on the dollar with the hope that it goes back up to 100 cents?

Well it's not a great plan, but in the scheme of things, it's IMO the best of the "plans" of all the crap plans. These loans still have to adhere to the guidelines of a typical conforming loan as far as amount, income and creditworthiness.

The government isn't getting or losing anything, except that based on whether or not the creditor pays or defaults. Currently many of the people in trouble have first loans that are F/F guaranteed, so in this case it's a gamble, either take a loss for sure, or if the person qualifies but is only held back by LTV, take the risk that they will repay.

I don't believe in principle reductions or loan modifications, but refi'ing some people with more than 80% LTV if they qualify is not a terrible idea in many instances...IMHO

<a href="/post/16462#comment-647845" rel="nofollow">Tude says</a>
<blockquote>Well it’s not a great plan, but in the scheme of things, it’s IMO the best of the “plans” of all the crap plans. These loans still have to adhere to the guidelines of a typical conforming loan as far as amount, income and creditworthiness.
The government isn’t getting or losing anything, except that based on whether or not the creditor pays or defaults. Currently many of the people in trouble have first loans that are F/F guaranteed, so in this case it’s a gamble, either take a loss for sure, or if the person qualifies but is only held back by LTV, take the risk that they will repay.
I don’t believe in principle reductions or loan modifications, but refi’ing some people with more than 80% LTV if they qualify is not a terrible idea in many instances…IMHO
</blockquote>
From that perspective I guess it makes some sense, unless prices drop further and instead of foreclosing on a house that is 75% underwater, the house is foreclosed on at 50% underwater with an eventual equivalent sales price.
As a current renter though, I'd rather not see any more government interference. This logic of "keeping people in their homes" seems to just keep people slaves to their mortgages instead of letting them fall to affordable prices where people can buy a house and still have money left over to eat, etc.

I want to add that I am only for refinancing a loan to a 30 year fixed rate based on the old 25-30% payment rules to people who have good credit and income. I think sometimes we confuse "keeping people in homes they cannot afford" with simply allowing credit worthy borrowers to have credit. I do not agree with modifying payments, artificially low interest rates, or modifying principle to keep people in homes they cannot afford, and those are the ones defaulting!
Again I think about my situation. When my husband bought he trusted a client who was a broker to do the best thing for him, she put him in a I/O ARM because she benefited, and he trusted her as a client and "friend". yes stupid of him, but that's what happened. At the time the loan was 50% LTV. Luckily I was smart enough to refi into a 30 year fixed after we were married while we still had 70% LTV. The ARM would have come due this summer, our yearly income is 60%+ of the loan amount and the PITI the same as rent and less than 20% our monthly gross. But....the loan is at about 120% LTV, and we don't have 80k+ sitting around to throw at the principle.
Seriously, I see this program as the ONE program that just MIGHT help deserving people stuck in bad situations.

As long as all of the qualifications are still required, then not many will qualify, I think. My fear is that the government is slowly chipping away to eventually implement a terrible give-away plan. First it was 80% LTV, then 105% LTV, now 125% LTV...what's next? Maybe they will drop the qualifications or a least loosen them by allowing people to use their last 5 year income average or something like that.

Tude,

Again, if they're creditworthy and didn't get a loan they couldn't afford, why should we give them an implicit tax payer backing? They can afford the mortgage, they agreed to pay for it. It's their choice to walk or stay, and they're perfectly capable of doing either. Why should taxpayer dollars be directly exposed as opposed to the bankers/investor dollars that are exposed right now?

If they were getting a NEW loan, nobody would loan them that amount of money on their house. It's not worth it.

It makes total sense for the "bank" to let the slight-of-hand to happen. It the donor (as in organ donor) gets off the table and rents across the street then the bank really starts to lose. But if you put 25% in the back and make just enough to cover it then what the heck?

The tough guy act only works when somebody actually wants the house.

<a href="/post/16462#comment-647873" rel="nofollow">Some Guy says</a>
<blockquote>
I agree. If they wanted a fixed-rate loan, they should have taken one out in the first place. Obviously, they overextended themselves and couldn’t afford the payments on a fixed-rate loan, which is why they got ARMs instead. So why do they believe they’d be able to afford the payments now? Why should these people be subsidized by taxpayer dollars? The only people who will benefit from this course of action are banks and the house-owners themselves, at the expense of everyone else.
</blockquote>
This is simply NOT TRUE. I watched it over and over again, and it happened to my husband, the realtors and brokers got much bigger commissions on the ARMs. I am not talking about Teaser rate alt-a I/O option arms, I am talking about standard 5/1 ARMS that only saved a quarter percentage points over 30 year fixed. I know several people in this situation, and like I said my husband just trusted the broker. It had zero to do with affording the payments.
To be honest, I was at dinner with a good friend Sunday who's ARM is resetting LOWER (from 5.3 to 4.1%), but he knows interest rates are going up eventually. With the housing market these people want to stay put. Some had huge amounts of equity evaporate and now they are over 80% LTV.
I was smart enough to see the writing on the wall soon enough or I could find myself f-ed eventually. Lots of people I know are worried about locking in now before interest rates skyrocket.
Not everyone was a loser purchasing too much house, or trying to get a low payment to afford it.

Fannie and Freddie already own these loans. It is to the benefit of the taxpayers to refinance these borrowers. If they walk from their house, fannie and freddie are already on the hook for the loss. Anything they can do to stop losses is to the benefit of the taxpayer.

greatrate2008 says

Fannie and Freddie already own these loans. It is to the benefit of the taxpayers to refinance these borrowers. If they walk from their house, fannie and freddie are already on the hook for the loss. Anything they can do to stop losses is to the benefit of the taxpayer.

This is not true. Everyone in this country is a taxpayer. This is because there is a hidden tax called inflation.

Even if the government already owns the loan, the government is now taking on the same loan with less collateral. The government will be loaning one hundred grand for every 80 grand in collateral. Obviously this is seriously inflationary.

People that rent will have to pay more at the grocery store for their food because of this program and also have to pay higher rents since this program will obviously support housing prices.

Also it seems that the government could also take on more loans that are not already backed by the government. This would be terrible for the taxpayer.

But the government already owns the same loan with less collateral. The loan amount isnt increasing. This just helps lower the homeowners payment making it more likely that they will pay their loan back.

Here is an excellent discussion of this plan:

"... ...This is incredibly flawed policy. The Government mortgage Agencies have created a window whereby borrowers can automatically get upside down on a loan. This is reckless lending and should not be permitted. This is much worse than any lending standard that existed in the go-go sub prime era. There is a mountain of evidence from academia, the government Agencies themselves and the mortgage insurance industry [MICA] that default rates explode when LTVs exceed 100%. Even good borrowers lose the incentive to pay back a loan. ... ..."

http://seekingalpha.com/article/146557-fannie-mae-and-freddie-mac-go-junk

I like the idea of allowing people to refinance even if they are 25% underwater and here is why
1. Until the economy start moving again and the velocity of money picks up, I worry much less about this causing inflation then I do about the government having to shell out money to bail everyone out.
2. The tax cost of insuring a loan at 125% equity to me seems a lot cheaper than the cost of bailing out the financial institutions who will be stuck holding on to depreciating property.
3. I do not see this as a reward to people who where gambling on the market as much as I see it as an opportunity for people who got screwed on their ARM reset to get a fair rate. If anything it hurts the companies who were holding those arms because they will have to give up the usurious interest rates they were charging
4. Allowing people to lose their home is bad for the country’s economic morality. The worse people feel about the economy, the less they will spend and the less they spend the further the economy will go in to recession.
I am against bailing out people who tried to take advantage of the market, but I do not see how preventing people from being able to refinance punishes them more than it does everyone else. Plus I do not see that everyone who took out an ARM should be punished. At the time it may have been seen as a reasonable option. Not everyone who took out an arm was an investor or someone who was buying in over there head. A lot of people however got screwed when their rates were rates where increased beyond normal interest rates and because there home is underwater they have no recourse other than to pay higher prices than others. Also, I would rather my neighbor be able to refinance his home to a normal rate then to be sitting next to a vacant house. With all this being said the 125% financing should only be available to allow people to refance there current mort and not to take out extra equity or to buy a home for no down payment

Well said, Some Guy.

These are people who made their beds, soaked them in gasoline, got into bed, and lit up a fat ol' stogie. Now they're complaining about the smoke?

d3 says

3. I do not see this as a reward to people who where gambling on the market as much as I see it as an opportunity for people who got screwed on their ARM reset to get a fair rate. If anything it hurts the companies who were holding those arms because they will have to give up the usurious interest rates they were charging

A lot of people however got screwed when their rates were rates where increased beyond normal interest rates and because there home is underwater they have no recourse other than to pay higher prices than others.

I am curious about some of the terminologies used above - "fair rate", "normal interest rate". What do they mean? When you are taking ARM, it means that after initial rate resets, the rate can potentially can go UP, or go down or stay same. Didn't they know that while buying home?

I personally know some homeowners who took ARM. When they bought their homes, rate going up wasn't their concern. Because.................................home price always go up, therefore you always can refinance.

What cost is associated to the taxpayer by refinancing loans that already have a government guarantee? Can someone explain this to me?

I agree the Obama plan will not help many of the people in the Bay Area. If he really wanted to keep people in their homes over the long term, giving bankruptcy courts the power to cram down loans would be the best solution. But, let's face a little reality. It was not buyers who were primarily to blame. In this housing bubble, the only people who were blameless were the sellers. In a majority of transactions, there was a seller, a buyer, and a bank providing the loan. The sellers' job is to get the highest price they can possibly get; the buyers' job is to get the best value they can get; the banks' job is to make sure value, price, and ability to pay are reasonably on par because it is their money at risk. This assumes no government intervention and in the Bay Area Fannie and Freddie were generally not in the picture until federally backed loan limits were increased.

When the banks' did not do their job, they allowed buyers to compete with one another with no regard to the buyers' ability pay and they did not look to see if value matched price. Sellers did exactly the correct thing in this environment, they raised their prices. As prices went up, buyers with sound financial sense and credit history were forced to compete with buyers that could just go to the bank and get a large loan they neither understood nor were able to pay off. That left buyers with financial sense and good credit two choices: 1) buy using the same silliness used by buyers that were being duped or 2) rent until heaven knows when.

Now some people want to fault the buyers for taking out "crazy loans." However, the reality is that a majority of these buyers during the bubble were purchasing with "other people's money" (the banks' money.) A good rule of thumb is: If it is your money at risk, you will be much more careful than if the money belongs to someone else. If you are the "someone else" you had better make sure you are looking after your money when you invest it.

The simplistic market idea of buyers and sellers agreeing on a price works in cash transactions. They do not work in credit transactions. In credit transactions, the creditor and seller must agree to a price. If creditors do not provide credit to the buyers...guess what...sellers' prices must come down. If the creditors provide an abundance of credit to buyers...guess what...sellers' prices go up. The creditors are investing in the buyers' position. If your creditors are foolish, they make bad investments. If they are smart, they make good investments.

Ryan says

If it is your money at risk, you will be much more careful than if the money belongs to someone else. If you are the “someone else” you had better make sure you are looking after your money when you invest it.

Good point. Therefore, there is no reason those homeowners to whine about. They played with others money. Game over. Pack your bag and rent somewhere else.

Going back to my orginal post, my understanding is that there are people out there who took out ARM loans and when the arm expired and the house was under water they ended up with rates that were 7+ % vs 5.25% or what would be a normal current rate. If that is not true, then I do not see how allowing people to refinance would make any difference unless they would be getting better then normal rates. I do not beleive we should be giving people abnormal rates ie 4%, but I think people who ended up with above normal rates should be able to refinance to the going market rate. If the person could not afford there home at a conforming rate, then yes they should lose there home because they never should have been able to buy it in the first place. I do not want my tax dollars to pay for people who over extended themself to have luxeries that I do not have because I bought what I could afford. I do however strongly feel that people who have abnormally high interest rates should have an opertunity to obtain a conforming rate even if the home is underwater. The intent would not be to bail out greedy people as much as it would be to lend a hand to people who have been set to abnormally high interest rates and cannot do anything to fix it because they are underwater and unable to refinance.