Tuesday, February 14, 2012

Obama's new mortgage proposal: This could only come out of Washington

The president is fond of meaningless showboating. Perhaps it comes from his love of basketball. Regardless, the latest mortgage foreclosure prevention initiative is devoid of meaning and is more likely an election year ploy. Its main feature is to have the banks pay for it. This means that the republicans will reject it and then the president can campaign saying that the republicans love the banks more than they love the people. On a more basic level, his previous proposal was a dismal failure. Of course he blamed the banks for the slow processing of the applications. But in reality, the paperwork burden and its costs slowed the processing to a crawl. The original program was supposed to prevent 4 million foreclosures but less than 200,000 loan modifications occurred. The reason is that the program was destined to fail. It was written by bureaucrats who had no idea what they were doing. Consider the following:
1. People with negative equity do not qualify for modification.
2. To qualify for refinancing, homeowners must possess at least 20 percent equity in their homes, have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, and have not missed a mortgage payment in the last 12 months.
3. The owner must have a loan that originated on or before January 1, 2009; have a principal balance less than $729,750 and use the home in question as a primary residence.
4.The Treasury will offer mortgage-servicing companies upfront incentive payments of $1,000 for every loan they modify and additional payments of $1,000 a year for the first three years if the borrower remains current. The Treasury will also chip in $1,000 a year to directly reduce the borrower’s loan amount, if the borrower stays up to date on payments.
5. If the lender reduced the borrower’s monthly housing payment to 38 percent of the household’s gross monthly income, the Treasury Department would match, dollar for dollar, the lender’s cost in reducing payments down to 31 percent of monthly household income.
The key to determining whether a person receives help will be a net present value calculation by the mortgage company. The lender will first have to calculate how much it would cost to reduce a person’s monthly payments to an “affordable” range, 31 to 38 percent of the borrower’s monthly income.
6. If the calculation shows that the lender’s cost in modifying the loan, after receiving the taxpayer subsidy, would be lower than the cost of foreclosing, the lender would be required to offer a borrower the new deal. If the estimated cost of the concessions appeared to be higher than the cost of foreclosure, the decision would be voluntary.
7.Borrowers cannot be charged any modification fees, the Treasury Department said. Lenders will have to bear the administrative expense of reviewing the loans and making their cost estimates.

No wonder many have complained that the program is a bureaucratic nightmare. What lender in its right mind would agree to these terms? Also aren't those with negative equity the ones with the most incentive to default? So why exclude them?

So here comes the new proposal where the government will triple the financial incentives for private lenders to reduce the principal amount of mortgages for homeowners deemed at risk of losing their homes. And for the first time, the government will offer incentives for principal reductions to Fannie Mae and Freddie Mac.

Finally, Obama can say that this will not increase the deficit since the banks will pay for it by adding a fee to monthly mortgage payments (some estimate that this could add hundreds to the payments) and by imposing a tax on large banks. Does the former make any sense to you? If people cannot pay their mortgage, the government is now saying that those payments will be reduced on the one hand and then increased on the other. Whoever thought of this nonsense should be fired and the embracing of it by the president means that he should be fired as well.

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