Here is one columnist’s take on the new program to reduce foreclosures. The principal reduction aspect is unusual and since it is unusual it could have unforeseen impact such as encouraging under water homeowners to quit making mortgage payments.
To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home’s value. It’s fine if you owe more than it’s worth.
Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies.
If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment - including property taxes, insurance and association dues - to 38 percent of your gross income.
The reduction can be accomplished in one or more ways:
– Reducing the interest rate, but not below 3 percent. (The new rate, if below market, goes back to a market rate after five years.)
– Extending the term of the loan up to 40 years.
– Reducing the principal on which monthly payments are calculated. Unpaid principal is added to the loan balance and due when the homeowner sells or refinances. The reduced interest payments never have to be repaid.
If you owe more than the home is worth, the plan will only reduce principal down to 100 percent of market value, according to an official for the Federal Housing Finance Agency, which supervises Fannie Mae and Freddie Mac.
If all three of these maneuvers can’t reduce your payments to 38 percent of income, you won’t get a fast-track modification but could still request a customized deal, says the official, who spoke on the condition of anonymity.
The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage.
Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.
“This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”
The government is offering loan servicers $800 for every homeowner they get into the plan.
Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.” [emphasis added]
{ 27 comments… read them below or add one }
Heather 11.17.08 at 7:35 pm
One hopes that Fannie & Freddie will have the foresight to review homeowners’ income statements & tax statements when creating the loan modification plan, so they winnow out folks who try to game the system as described above. Oh, but then again, we’re talking about the US government…. Chances of winnowing out cheaters seriously in doubt.
Forgive me, but all this dismal housing & economic news is turning me cynical. Sometimes I wonder if there’s a single person in Washington who’s got any common sense left. Maybe I should apply to head the agency that does these loan mods.
Artur | Central Phoenix MLS 11.17.08 at 8:12 pm
This is very amusing. If so many people we not getting hurt this entire situation would be comical.
dan 11.18.08 at 6:56 am
Arthur, Hurt? Is either living in a home that you can’t afford, or living in a home and not paying the mortgage really hurting anyone, besides the poor guy at citibank who just got let go yesterday. If we would have put some “hurt” into mortgage default, I would argue America would not be in this situation. Why not start by saying if you go into foreclosure, you will never ever own a home. Why not start by having a foreclosure hurt your credit so badly, you will never have another credit card. Why not start by saying if you not an American citizen and you default, you will either be kicked out or never welcomed back to America. Why not garnish wages like we do to divorcees? Now we are talking hurt!!!!! Its as if, we have gotten so PC, we can’t even shed blame on the real cause of the mess.
John Wake 11.18.08 at 7:04 am
“Why not garnish wages like we do to divorcees?”
Interesting comparison!
John Wake 11.18.08 at 7:22 am
“I nominate Heather to lead the new loan mod agency!”
[Agreed by acclamation.]
krogers 11.18.08 at 10:59 am
So my wife and I just purchased a house and we meet all the criteria above (we have absolutely no debt and are scrimping to balance out on our utilities/food) but we are able to afford the house we wanted. After all association fees, etc… I think our monthly payment works out to be about 43 or 44% of our income and this is at 6.5% interest, so I could go with option 1 there.
Are we stupid then to not just go delinquent and have our interest rate drop down for 5 years and shave off a hundred bucks or so on our monthly payment? I mean, all it will really cost is my morality, knowing that I’m taking other people’s tax money to fund my house.
Thoughts?
ks 11.18.08 at 3:18 pm
Be careful of what you wish for.
If “real” hurt were to be put into forclosure, then the risk of buying a home would go up. When the risk rises relative to the reward, the price goes down. Also, putting-hurt-in-forclosures would not be able to be enacted retroactively. This means that once a hurt-in-forclosure law was put into place, only homes bought after the enacting of the law would be in danger of being “hurt”.
The blame game is fun! Lets play some more. (Bonus points for blaming Bush, Obama, Clinton, Reagen, Liberals, Conservatives, the rich, or the poor.)
Brian 11.18.08 at 8:06 pm
We live in interesting times. I love the academic side of these arguments. It is a 24/7 entertainment program. But now the wolves are howling at my door and what was a theoretical mental exercise is becoming my own personal reality (we just had layoffs at my company today and I was told my name was under discussion, though thankfully, I missed the cut this time).
So, while I would like to stay philosophically pure and wholesome on the issue of “moral hazard” because I am all about personal responsibility and accountability, protecting my home and my family dictates pragmatism. Let’s find a way to fix the problem, even if some people find a way to take advantage (they always will). If it requires a massive mortgage interest “buy-down”, then so be it.
MPS 11.21.08 at 10:01 am
Dan,
Punish people for what? They signed a contract that said their home was collateral on their loan. The lenders write the contracts not the consumer. If a homeowner chooses to walk away the bank gets the house fair and square. The bankers and wall streeters created this mess. The lenders loaned money on homes with artificially inflated prices. Then greed mongers liked the big returns on this “lo-risk” debt and bought the crap. They are the ones who schemed to make those prices happen. The working class consumer is the victim here. They had the least information. On that note I think what homeowners who are struggling to pay their mortgage and can’t sell because their loan to value is more than 100% should do is walk. Stop paying their mortgage now and wait to be evicted. Paying these mortgages that are all packaged in derivatives when it’s a losing battle is senseless. The economy would be better served if they took their December mortgage payment and flew home to visit family or bought toys for their kids or bought a new car or whatever. This would have a much more positive effect on our economy than paying that mortgage. The money will go back into the economy no matter how they spend it whether it be paying down student loans, car loans, credit cards, investing in stocks or buying goods and services. Even sticking it in a savings account would probably be better. Nobody can price those mortgage packages’ values anyways so essentially they’re all worthless. Plus the housing prices, without the effect of over-leveraged-loan products need to retreat to what wages really support. Why try to stall it. It’s not like they’re going to resume 100% no doc loans again and have the market bounce right back. The housing market is bust. We need to save the rest or our economy. If you’re upside down on your home you should consider walking! And if that thought doesn’t at least cross your mind, yes, “Idiot” is a good name for you. If you have credit card debt and can get away with it you might as well file BK at the same time since your credit is already going to take the hit. The American consumer is too in debt. Cntrl-Alt-Del, time to reboot.
Brian McMorris 11.21.08 at 12:14 pm
Wow, great debate MPS. Even though I normally disagree with your class warfare mentality, (you reference “working class consumer” as if the person wearing that label is some helpless serf), I can’t argue with your logic. Indeed, a mortgage is a contract where the home is collateral and the lender is entitled to the loan if it defaults. So far, so good.
But there is a big element of Trust in any contract. When a contract is entered, it is done so with the intent of fulfilling the obligations in that contract. This is where “willingness” enters in to Tort Law contract language. If it can be proven a contract is drafted by a party that intended to deceive the other party, or where there was no intention of fulfilling the obligations of that contract from the beginning, then there would be a legal argument for Fraud by the plaintiff, the mortgagor in this case.
Still, it could be argued that people did not enter into home mortgages with the intent to defraud the bank (and in most cases this is probably true). But consider the cost to our society and free market capitalism if Trust is impaired either permanently or for a very long time for consumer transactions like mortgages: One party will not lend to another for fear of not having the contract fulfilled. It matters not that one party is a bank and the other party is a poor helpless consumer. Trust between two parties to a transaction is essential for capitalism to work.
So, while you are espousing everyone who finds it to their advantage to unilaterally break their contract, consider the long term cost to society. You may never be able to buy another thing on credit. Maybe that is good, but maybe credit is what allows an economy to grow and allows the not so well off to do better.
krogers 11.21.08 at 12:32 pm
I agree on points made from both Brian and MPS, but I tend to side more with MPS’ “smok’em if you got’em mentality” in regards to walking away. Even in the article posted, the man who markets FICO credit scores admits that if you can get the lender to let you keep the home after 3 delinquent payments then do it! His quote:
“If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I’d be for keeping the home,” Watts says. “Your score will bounce back.”
The credit score hit was another reason for myself to not even bother toying with the idea of just letting our payments go delinquent and letting fannie and freddie pick up the slack, because I plan on using that credit score in the near future rather than down the road.
It just makes me wonder how through the checks are to determine if you qualify for fast tracking your loan. When we applied for our loan, they only required 2 paychecks to determine our current income levels, and I’m sure it’s all they use to determine financial hardship happening as well.
dan 11.21.08 at 3:24 pm
MPS, I just pulled out one of my many mortgages I pay every month, and read line 1. Borrower’s promise to pay: In return for a loan that I have received, I promise to pay U.S. XXXXXXX plus interest, to the order of Lender. XXXXX. I will make all payments under this note in the form of cash, check or money order. If that isn’t clear enough, I don’t know what else tell you, but I will meet you half way. Let the banks have the houses, but every deadbeat gets booted out, and doesn’t get one dime from the feds to stay in that house.
MPS 11.21.08 at 4:06 pm
Brian,
Big element of trust? What? Corporate policy is to lie lie lie for the profit of the company. Why else would they have ‘PR” and Risk management departments with all thier lawyers? The contract states that if you don’t pay your mortgage the lender takes the home. They wrote those contracts with the assumption that the homes appreciate instead of depreciate and somehow forgot that the classic mortgage contract involved a huge incentive to not walk away called a downpayment. But its easy to foget these little facts when they’re raking in huge amounts dough. Basicly there are NO morals and there is NO trust already. That’s why lawyers make the big bucks. That’s why you have to sign 20 pages of small print to joint a freakin’ gym.
MPS 11.21.08 at 5:01 pm
Dan,
Yup, the bank get’s the house. There is no good way that the government can even intervene in this. If people start walking away in mass and they will as they become more upside down, the lender will have the incentive to restructure the loan because it’s better for them than owning another house with missing appliances and what ever else. It’s better for the economy too. Over leveraged consumers cannot participate in a market recovery. Time to cut the losses. Walk away from those deflating ballons. Personally I think the Feds should have opened a new bank (by purchasing some failing banks) with the “bail out” money instead of attempting to “bail out” these slimey institutions. The feds should act as the big vultures here not the big saviors. They should take over the autos too but the upper management with their mulit-million dollar salaries should be put out. Later these government owned corporations should be sold.
MPS 11.21.08 at 5:14 pm
Please note that the 38% applies to your befor tax income. If you’re making 50K that is a payment of $1,583. If you’re paying $1,583 for a mortgage on 50k a year you’re still broke as a joke. You’re not saving for your future. This may help the bank but it doesn’t help you that much. That’s why this program is not going to work. You’re better off walking away if you’re upside and you will still be upside down (which is likely) after they restructure your loan.
Brian 11.21.08 at 8:28 pm
Dude, you keep talking about the “Feds” if it is someone else, but you know what? the Feds is you. You own the Fed. So, what you are advocating, in some twisted way (you were doing better with your logic earlier) is “let the slimy banks fail” (and they will if everyone walks from their contractual obligations), and let the Feds (you) “act as the big vultures”. So, you want to walk from your house, and then walk back in as the Fed vulture. Makes no sense. Simpler to just stay put.
MPS 11.22.08 at 1:56 am
Brian,
I’m not in the government. I all do is vote and pay taxes. I’m a grain of sand on the beach. There was no public vote on how to best tackle the credit freeze. The Fed is us, sort of, well we fund them not really by choice, but it’s certainly not “me”. I’m not Paulson. He’s the one deciding how to spend 700 billion dollars. I don’t get to look at the banks books. I don’t get to sit in on thier meetings.
How is it better for someone who is upside down on their house and barely making ends meet to sit and wait. What exactly are they waiting for?
Their money is better spent on anything else for their individual good and for the good of the entire economy.
I’d feel more comfortable if the government were taking over the banks that had some concrete value left to them instead of giving them money. Who knows what the banks are doing with it. (Aquistions, big CEO bonuses?) Wehaaw merry Christmas to them.
I don’t get your arguement. What makes no sense to you?
Brian McMorris 11.22.08 at 2:19 pm
What makes no sense is that your arguments are all about “me first”. I don’t know you, so I can’t say you are personally a selfish person. But your arguments are calling for people to put themselves ahead of everyone else. This is a great idea for “end-times”, but not such a great idea if we all need to live and work together in a society.
All the problems in our society you complain about, came about because of selfishness, whether it is the big, bad corporations, the lenders or individuals within the government more worried about their election prospects than our country. I am afraid your advice is just more of the same. How can more selfishness solve the problem of selfishness? This is what I do not get. If this is the best we can do: “screw the other guy, before he screws you”, then we are really doomed as a society.
MPS 11.22.08 at 3:36 pm
I’m stating that I beleive that it’s better for the GOOD OF ALL for people who are broke to walk from their houses if they’re upside down. These at risk mortgages are already causing the credit freeze because nobody knows how to value the investment vehicles that they are packaged into. Most of them will end up foreclosures anyways. Essentially it’s like they are already worthless. It would be better for the idividuals who are strapped to these mortgages to free themselves and spend their money elsewhere. That is my theory. It’s better for everyone in the whole world. I’m not saying these people should quit working and ask for hand outs. As long as these people keep working and don’t start sticking cash under their matress they will be better contributing to a recovery than staying broke and paying an at-risk-mortage. I’m paying my mortgages. This is about everyone, not me. What is it that you think I’ve been critisizng in my posts on here? It’s the culure of greed in this country that has caused this all. It’s the polarization of wealth. It’s the do anything to eek out more profit mentalitiy. It’s the every man for himself mentality.
I work for big corporations and am often the only one in the company that has total acess to all payroll data. I will give you an example: In 2006 I worked for Sempra Energy in San Deigo. Three indivuals got 50 million dollar bonuses that year. There are less than 15,000 employees working for Sempra. If you took just these bonuses away you could give the entire company a $10,000 raise. (This is a public utility company!) For many employees that is a 40% pay increase and means they can save some money for the first time. For others that is the difference between paying college tuition for thier kids instead of them not going to college or coming out of school burried in student loans.
The trick this whole time was to make short term profits the number one priority while telling the working folks that they’ll share in the wealth because they can buy stocks too. They’ve preached that if they lower taxes on those with the most that we’ll all benefit because they’ll give us better jobs. Now we have a “bail out” that is putting the corporations’ interests and again stating that it is the best for everyone when it obviously is not. Well, you’ve seen where that gets us. Cutting peoples mortgage payments to 38% is good for the banks but not for those still forking out 38% of pretax income for a depreciating asset and not the best idea to get out us ALL out of this mess.
Brian McMorris 11.22.08 at 4:16 pm
I guess we just agree to disagree. I think a unilateral breaking of a promise, the mortgage contract, is selfish and unethical. You do not. The fact that it is beneficial to the homeowner to walk out on the mortgage does not make it better for society, but makes it greedy and selfish and wrecks our social system. But, I probably can’t change your mind. However, you then mix pay inequity into the argument where it does not belong. What does one problem have to do with the other?
The solution to pay inequity is for shareholders to get ticked off and boot out their Boards that agree to the lousy / unfair pay packages. It is the Board of Directors in our corporate governance system who decide compensation. I am with you on this. I believe they all are in cahoots and doing a huge disservice to our nation, capitalism, the common stockholder and their own employees. But corporations are democratic by design and accountable to their owners, the stockholders. It is up to the stockholders to fix the problem.
I will even go further on this point, maybe stockholders need some extra help on this point, since it is often hard for them to get together and make something happen. I am okay with the Congress changing the laws on the legal creation of corporations and taking that power from the States, where it now resides. Certain states are using this power to their own advantage, Delaware being the best example. Delaware gives corporate managements too much power and allows the creation of things like poison pills that discourage accountability, integrity and fairness. Because it favors the managements, many set up shop in Delaware by a P.O. address only. This is not much different than setting up in Bermuda from an ethical standpoint. Because everyone in the country is affected by the corporations legal requirements, the laws governing corporate entities should be national, not state enforced. This would go a long way to solve the pay problem.
Once corporate laws are put under Federal justice, another thing that can be done for pay equity is to require a shareholder vote on executive compensation. Currently that authority is with the Compensation Committee on the Board. But the Board is often hand picked by the Executive Management, so that can be a sham. We would still have the problem of institutional ownership of a majority of the stock in some companies. Institutions like mutual funds are mostly short term in their profit and stock performance expectations, but we would at least be moving in the right direction.
I also favor holding executives accountable for the financial performance that leads to big bonuses and stock price increases benefiting performance stock options, by applying a fraud standard and making it easier to prove fraud. Executives who cheat at reporting financial results are already subject to this standard under Sarbane-Oxley and GAAP accounting standards (as we saw with Enron and others). But these standards could be tightened up even more to discourage over-compensation via bonus and stock options.
But getting back to the point of homeowner responsiblility, it would be much more ethical for a homeowner in trouble to sit down with the lender and make the best deal possible. If that deal is a short sale or some other bi-lateral agreement on how to get out of the mortgage, then the lender has a say in the matter and can work with the homeowner. That is much more the spirit of a contract and will not undermine the trust we need as a nation to move forward.
ks 11.22.08 at 7:57 pm
Trust! We need trust!
The banks do not trust each other. I wonder why that is. Perhaps the banks know what to expect from other banks. Perhaps the banks expect other banks to obfuscate and even lie.
It would be naive to think that the banks have been doing anything less than what is in their best interests. Yes, naive, and even foolish. Heck, perhaps STUPID.
I have a good question: How many people are doing jingle mail? I have not seen anything other than anacdoctal evidence. I know one thing: Jingle mail is not the reason for the destruction of the banks. The banks acted in a short term foolish manner and made very bad errors in risk analysis. The lack of reasonable risk analysis, coupled with highly leveraged greed, turned the bank balance sheets into toxic junk.
Trust!
Give me a break!
MPS 11.22.08 at 8:12 pm
The banks are currently not making reasonable deals with their homeowners. 38% is not reasonable.
My main point is that money spent on plane tickets or for dvds at targets or on a new car is better spent right now then dumping it into the deep pit of mortgage derivatives. Picture that “stimulas package”, to have millions of homeowners all of a suden have $2000/mo extra spending cash for the next three months. Why should the care about the morality of foreclosure. They were deceived (”I promis you’ll be able to refinance into affordable payments within months, and if not you’ll be able to sell for a profit”) It’s about survival for them, and the rest of us too.
Income ineqaulity is one of the big underlying causes of our problems. The housing bubble is a symptom of our hollowed out, greed driven corporate culture.
Brian McMorris 11.23.08 at 4:03 pm
MPS, you and KS and others visiting this blog have helped me understand how we got into this mess. Blaming “the man” for all your problems is exactly the recipe for economic disaster. But it also makes me very discouraged because of this is where many Americans are at, we are all doomed.
MPS 11.23.08 at 4:49 pm
Hell yeah we are blaming “the man”. THe man being greedy pig corporate CEOs and yes the federal government too for not doing anything about it. Ya see, the most of us have done exactly what our leaders want us to do. That is to go in debt for a college education, work 50 hours a week, invest in stocks, invest in real estate and than watch the rich get richer and richer while we see bubbles crash on our heads. Should I blame myself for deravatives, for the auto industry not designing more fuel effecient cars and not saving enough cash for a rainy day? Should I blame my self for having student loans and being unemployed even though I have a bachelors in computer science which was exactly what Corporate American was crying for people to do in 1998. Should I blame myself for a bail out plan that appears to not be working because they are giving the money to the very people who caused the problem in the first place. Maybe if I just worked 100 hours a week? Maybe if I went another 50K in debt and got a masters in Computer Science? My whole generation is broke for doing what everyone told us to do. And now according to Brian, we are to blame ourselves. But it isn’t it clear as day here? Our leaders and corporate greed caused this with their short sighted, immediate gratification based decision making. Brain, you sound like brain washed Joe Plumber with your GOP catch phrases. “Blame the man” Lets just sing cumbaya now and all try a little harder and make sure we stay in those 100K upside down homes and live paycheck to paycheck. Nah, if you’re upside down and you’re living paycheck to paycheck you’re an idiot if you don’t walk away from it. If you don’t, then you can blame yourself for being brainwashed like Brian.
krogers 11.24.08 at 4:38 pm
But the greed extended on both sides of the fence, and I think that’s what Brian is arguing.
Playing devil’s advocate here, but you can’t tell me that some people out there weren’t going “Wait a minute, you mean if I sign on this dotted line here, I can hold this property for 2 months and then make $15k?” Both sides were greedy. Our Realtor told us that during 2004-2006 years, that people would take a loan out for over the amount of the house and split the profits of the 30 year loan with their real-estate agent and sometimes the lending company! Obviously you can’t do that anymore now, but I can’t believe people were getting away with this!
All the paperwork was right there, all people had to do was some research! I did my research, it was not that hard to figure out the right loan for me. But no, people are lazy about it and they are half to blame for this scenario.
My wife and I both use to watch the Home and Garden television shows of people buying houses, and 2 people would be looking to upgrade from their 800 sq ft apartments. Fair enough, that’s what my wife and I did. But then they’d go looking for 2800-3200 sq ft houses because they “needed the space”. Purchasing the McMansion above your means caused a lot of the problems as well.
With that said though, the fact that banks let the money even come out, that people would even lend it out, baffles me. However, I think John posted an article on here indicating that it was less risky to have a lot of high risk mortgages than fewer low risk mortgages, so maybe there is some math behind it after all.
I agree a lot with MBS, but I can’t totally discount buyers from the equation. Too many people didn’t do their research and the greedy, lassize-faire ideals are EXACTLY what happened in the roaring 20’s and we’re in exactly the same situation now. Why can’t people learn from history?
MPS 11.24.08 at 5:10 pm
Sure, I agree, their is blame to put on the consumers too. But you have to look at the big picture. You have people who work their asses off to make ends meet and then someone comes and tells them all they have to do is sign here and they can own a home and build equity for the first time in their life with no money down and sure thing they will. So many people had nothing to loose and thought if they didn’t do it then they’d never have a chance again. In 2006 in San Diego 8% of the workforce can afford to own a home. People here were looking at them and saying, wow is PHoenix turning into another San Diego. But yeah, there was plenty speculative greed and investors and blah blah. Most of them are already gone. What’s left is normal working class folks who bought their primary residence at an inflated price and are stuck spending too much of their income on a depreciating and upside down asset. Those are the people who need to walk. It’s best for everyone I think. Forget the morals. There’s no morals in corporate America. Its funny when they make you go to ethics training and someone blurts out “I’m asked to lie on a daily basis and you want to teach me about ethics?” I love that.
Brian 11.25.08 at 7:15 am
“Forget the Morals”….Pathetic