A Housing Crisis Plan That Might Have Helped
President Obama’s current housing plan is not going to fix the problem, and yet, last July the Congress passed a mortgage aid bill that would have helped and certainly addressed the problem at its core (unlike the Obama plan). Unfortunately the mortgage aid bill has gone by the wayside and has been superceded by the Obama plan. Let’s understand first the biggest problem with home mortgages right now.
The Home Mortgage Problem
Housing prices in much of the country have fallen dramatically. If you look at places like California, Arizona, Florida and Nevada housing prices have dropped as much 33% or more from their height. Let’s say you bought a house in Arizona in 2005 for $285,000.00. That house today is worth approximately $190,000.00 if you are lucky. Let’s say you took out traditional first and second fixed-rate mortgages on this home at fairly low interest rates available in 2005 of 6 and 8 percent respectively. Let’s say you have great credit in the 700’s. You’ve never missed a payment on that home, and yet it is no longer a sound investment and won’t see its paid for value come back for at least a decade. If it weren’t for harming your credit, the business savvy thing to do at this point would be to walk away from your home. Why continue to take a 33% loss on this purchase when it will take a decade to recoup your losses. Instead you could default now, buy another home (maybe with a relative co-signing) at a much lower price and begin to see the equity on that purchase grow within a couple of years. That’s the economic sense at work in the housing market right now.
A Housing Recovery Plan That Might Have Worked
Back in July of last year, the Congress understood this exact situation and passed a mortgage aid bill that would have greatly assisted the homeowner described above. The bill was specifically designed to allow borrowers to refinance their mortgages bringing down the principle owned on the home (hence attempting to align it more closely with its current value). The way the program was supposed to work was the government would back the principle difference in the rewritten loan to the bank (alleviating the bank from having to reduce the value of an asset). The government would then be paid back by the borrow when they went to sell the home. They couldn’t sell the home for a year. If they sold it between years 1 and 2 after refinancing the loan, the government would receive 90% of the profits, between years 2 and 3 80% of the profits, and so on until the government reached 50% of the profits which would remain in effect for the life of the loan. So even if you sold the house 10 years from now the government would still receive 50% of the profits.
This program made a lot of sense. It protected the bank from having to absorb huge losses in real estate divestments and foreclosures. It protected the federal government in the sense that they would eventually receive some money back and in some instances, long term, would even make money. And it made sense for the borrowers because now their home would be valued closer to its worth incentivizing the borrower to keep their investment.
So what happened to this program? When I called my financial institution about it back in August of ’08, they explained to me that they were waiting for the Federal Government to provide the information/terms of how the program would work, and they expected that information to be forthcoming in October of 2008. Of course in September of 2008, the financial crisis hit and all plans were changed with the $750 billion Toxic Asset Relief Package. We’ve seen how well that worked out. And now the 2008 mortgage aid program is defunct, not in service, not funded by the government. The only program that would have truly helped home owners that could actually pay their mortgages and provide incentives to stay in their homes is gone. In its place is the Obama plan.
The Obama Housing Plan
The Obama Housing Plan will not help solve the financial crisis. At best it will prolong it, and then it will contribute to a further decline and further foreclosures in housing. Why do I say this? The Obama Housing Plan does not help the people described above in my problem scenario. According to the New York Times:
Q. What if my home is worth less than my mortgage?
A. “Underwater” homeowners may still be eligible, but your new mortgage can’t exceed more than 105 percent of the property’s current market value. In other words, your loan can’t be 5 percent higher than your home’s current value. So if you live in areas where home values have plunged the most, like Florida, Arizona or Nevada, there’s a good chance you won’t be eligible. According to an article by my colleague John Leland, about 20 percent of the country’s 50 million mortgage holders owe more than 105 percent of their house’s value.
And this my friends is the crux of the problem. The housing bubble and current housing crisis was built on home prices escalating far beyond their worth. They have come down as I mentioned in some states as much as 33%. Most home owners who can afford to pay their mortgages but are so completely upside down in cost to value ratio have no incentive to stay in that home, and they do not qualify under the Obama Housing Plan for assistance. Even those in sub-prime mortgages who could have their home prices greatly reduced by new fixed rate mortgages may not qualify due to the 105% house value clause. For those in sub-prime mortgages that aren’t upside down in their homes, they may not qualify because the plan states that their mortgage payment cannot exceed 31% of their gross monthly incomes. For many of those whom took out sub-prime mortgages, this will be a deal breaker.
What We Are Left With
The result of the Obama plan will be disaster. Few people will be helped. The resulting loan to home value will continue to rise as housing prices continue to decline and more and more foreclosures continue to occur. I’m not sure why I am so surprised by all of this as I’ve never believed that government can help the private sector. Their claims “we are the government, and we are here to help” is as Ronald Reagan claimed the scariest words you’ll ever hear. And today they are words that are not helpful at all.
We could have had a housing crisis plan that may have helped. In fact, one was passed in July of 2008 under the Bush Administration, but it never went into effect. Why? Could it be that it might have mitigated a crisis that Rahm Emanuel says should always be taken advantage of? Is the July 2008 mortgage aid bill retraction in the end going to result in nationalized health care, destruction of our own energy development in the name of a faux global warming crisis. Is all of this obfuscation by the Obama Administration and their implementation of a Housing Plan that won’t work a way to keep this crisis going so that they can continue to cram their socialistic government down our throats? I know the answer, do you?
Update — Links to Info on the Original Mortgage Aid Plan (from Mahalo.com)
- Bloomberg: Bush Signs Measure for Homeowners, Fannie, Freddie (July 30, 2008)
- International Herald Tribune: Bush signs sweeping housing bill (July 30, 2008)
- Yahoo! News: Provisions of housing-mortgage relief bill (July 26, 2008)
- The New York Times: House Passes Housing Bill After Bush Says He Will Sign It (July 24, 2008)
- New York Times: Housing Aid Bill Passes Senate Test (June 25, 2008)
- Reuters: FACTBOX: Comparison of Senate, House mortgage rescue (June 24, 2008)
- Financial Times: White House veto threat to proposed housing law (June 20, 2008)
- Topix.net: Mortgage Aid Plan
- Google News: Mortgage Aid Plan