Government Plan to Help 10 People to Cost 75 Billion Dollars
I was rearing to go today in preparation for the Government mortgage plan that was to surely reward the foolish and take from the sound. I had already formulated a few thoughts to write down. Then a funny thing happened. The mortgage plan was on its merits silly, out of touch, and utterly feckless. If this is the kind of plan we get when we do actually get details, I cannot wait to see the new bank rescue plan should Timmy G ever get around to it.
Thanks to the site Capitalist Preservation I was able to get breaking coverage even while at work (yes I have a real job!). I was chuckling in my cubicle as I started to look over the details, most especially the questions and answer page and example listings.
Let's start with the Q&A page here:
How do I know if I am eligible?
Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.
I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?
As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.
Will refinancing reduce the amount that I owe on my loan?
No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.
Is my lender required to modify my loan?
No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.
I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?
Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.
That is a whole lotta NO's and a very small price window to qualify under.
The next act in the comedy show was the "real world" examples to make it easier to see what is offered. Full page here (PDF file).
First up, family A:
In 2006: Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.
Today: Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000.
Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing.
Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.
Forget about the whole new LTV allowances, did you see that 20% down line! That is a pure laugher. If the government thinks there are going to be a lot of loans like this they are dreaming. If Family A really put down 20% they would not be on the verge of foreclosure anyway. Classic.
Now onto family B:
In 2006: Family B took a 30-year fixed rate mortgage of $350,000 on a house worth $475,000 at the time. (The family put just over 26% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.
Today: Family B has about $337,460 remaining on their mortgage but their home value has fallen to $400,000.
Their “loan-to-value” ratio is now 84%, making them ineligible for a Fannie Mae refinancing.
Under the Refinancing Plan: Family B can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $4,000.
Another whopper straight out of fantasy land. 26% down! Dreaming once again.
Families A and B may exist out there, but they are not really the issue. How many non-conforming loans are out there? How many were repackaged to Fannie/Freddie? Imagine an easier and far more common scenario using family B's numbers:
In 2006: Family B took an interest only mortgage of $475,000 on a house worth $475,000 at the time. (The family put nothing down.) They received a non-conforming loan with an interest rate of 6.50%.
Today: Family B has about $475,000 remaining on their mortgage but their home value has fallen to $400,000.
Their “loan-to-value” ratio is now 118%, making them ineligible for a Fannie Mae refinancing, or any other anywhere, anytime.
That example is a generous one at that. There are so many others so much worse.
The final family C example from the government is the only one I really cannot figure out:
In 2006: Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker – Mom & Pop Mortgage – sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.
Today: Family C has $214,016 remaining on their mortgage but their home value has fallen -18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.
Their loan is now 113% the value of their home, making them “underwater” and unable to sell their house.
Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.
Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.
This seems like a "kick the can down the road" plan meant to hide reality a bit longer. Sort of a conforming exploding ARM if you will. Again, how many will even want this deal?
There is some more stuff about how the government and the lenders will work out the numbers, but it is complicated.
Consider how many loans were obtained using fraudulent information. Will the government make sure all documentation is done this time? I could go on, and on.
So what was the point if the plan is so weak? Two things come to mind:
1.) The government will be able to say "look, foreclosures are dropping! We rule!". Sadly the mainstream media will miss the fact that Fannie/Freddie and others have a foreclosure moratorium on since December. Now others major players are waiting until after March to proceed. Of course foreclosures are going to drop for a while, none are being initiated!.
2.) That 75 Billion is not going to be used, not enough people will qualify. Do not expect that money to sit tight though, there will be sweetheart deals aplenty (think Chris Dodd of Conn.) for the government cronies to get new mortgages.
So what about that other 200 Billion dollars, the real meat of the plan?
Mortgage Subsidies for the Chinese
Late last week I read an article that covered the Chinese finance minister calling for more explicit guarantees of agency mortgage debt, ie Fannie/Freddie debt. (sorry, I could not pin down the link!) And now the government extends those guarantees from 200 Billion to 400 Billion in an afternoon. Ask and you shall receive. Hat tip Housing Doom and these relevant articles:
Central Banks Continue Retreat From Agency Debt
Twice As Effective Twice As Sovereign Fannie-Freddie Backstop Swells
Hence all the "conforming loan" language reiterated about 100 times in the government releases. This is an obvious effort to placate foreign mortgage debt holders that the US had their backs, no matter what.
What could be causing this stir? Take a peek at this compilation of mortgage performance for non-agency loans! One line shows us that as of 1/31/2009:
Delinquent (30,60,90 days,REO&Foreclosure) = 24.13%
A full quarter of all loans are in some form of foreclosure proceedings. That is scary!
Granted those are non-agency, non-conforming loans but how much better are the number for those? Might you want a more explicit guarantee if you held a ton of that paper? Yup.
A long post, but the events of today need some serious study. There is more going on below the surface than we can see. Transparency has gone the way of the dinosaur for over 8 years and it seems it will stay extinct for some time to come. Please use the comments section to add to this discussion.
Have a good night.