By Taum Hemmingsen, Owner/Broker-Marketline Mortgage, LLC
Next Tuesday marks the beginning of a new presidential administration. No matter where you fall in the political spectrum, and politics aside, let’s take a closer look at Obama’s plan-to-date on topics related to home ownership.
1. Rates
For the immediate quarter or two you can expect volatility to continue in the financial and credit markets. This means mortgage rates too. Rates are at historic lows with 30 year fixed rates less than 5%.
2. More Economic Stimulus
Since trouble in the economy won’t wait until January 20th, plans for another economic stimulus package are already in the works, so we might even see this happen, in one form or another, before Obama takes office.
Obama has discussed a housing stimulus to stem the tide of foreclosures, including a temporary 90-day freeze on foreclosures, as well as measures to address the demand side of the housing issue. This package includes $25 billion in state fiscal relief, which Mortgage Law Central says will help avoid “painful property tax increases.”
Obama also wants to “aggressively and comprehensively” implement the recently-passed rescue plan and the Hope for Homeowners Act. This means the Treasury, HUD, Fannie Mae and Freddie Mac, and all of the banks and loan servicers who benefit from the rescue bill will continue to coordinate broad mortgage restructurings and loan modifications for struggling homeowners. No one knows for sure exactly how this will be implemented or what it even looks like yet, but we’ll keep you updated as the details are released.
3. Reformed Bankruptcy Laws
Obama has promised to repeal the 2005 bankruptcy bill. A controversial measure, this will allow judges to alter mortgage terms during a bankruptcy, providing more relief for struggling homeowners.
4. New Mortgage Interest Tax Credit
Obama is expected to create a 10% universal mortgage interest credit for those who don’t currently itemize. This means about $500 in savings for 10 million American homeowners.
5. Protection Against Mortgage Fraud and Predatory Lending
During the campaign, Obama blamed the financial crisis on lax government regulations, so look for tougher regulations, new criminal penalties for mortgage fraud violators, more funding for enforcement programs, more detailed loan disclosure laws, new counseling programs and other consumer protections, including a new Home Obligation Made Explicit (HOME) score (kind of like an new APR calculation) to help borrowers better understand and compare mortgage costs during the mortgage process.
This should go a long way in protecting new home buyers from the opportunists that have given good mortgage professionals a bad name in the last few years. We hope that any new measures introduced by the Obama administration will help as the real estate market begins to change for the better in 2009 and beyond.
{ 19 comments… read them below or add one }
ken44 01.15.09 at 9:15 pm
–3. Reformed Bankruptcy Laws
Obama has promised to repeal the 2005 bankruptcy bill. A controversial measure, this will allow judges to alter mortgage terms during a bankruptcy, providing more relief for struggling homeowners.–
I understand there are restrictions on who qualifies such as you must have purchased your home after 2005 and it must be your primary residence. But how will a judge determine the new rate? Will it likely be based income?
And will this actually slow the foreclose rate and help halt the plummeting housing prices?
If someone is underwater well over 50 thousand dollars why would they want to keep the property esp. if they only put say 10-15 grand down?
John Wake 01.15.09 at 10:35 pm
Although Obama may want to repeal the 2005 Bankruptcy Bill, I believe bankruptcy judges still couldn’t alter mortgages even before the 2005 legislation. They could alter most other debt, I think.
I think the change could slow foreclosures because the judge could say your $200,000 mortgage is now a $100,000. Not bad. The down side is that you have to really be bankrupt. The banks may not abject too much if the judges don’t go crazy.
One of the major banks already “voluntarily” said it would allow bankruptcy judges to change their loans.
I hope any such change is only temporary, otherwise, private money will be less likely to ever invest in mortgages again and the Feds will remain the mortgage lenders of first, middle and last resort.
ken44 01.16.09 at 12:18 am
Thanks. It’s going to be interesting to watch how Obama and the Dems handle the housing mess.
Shift 01.16.09 at 10:31 am
This has gone beyond interesting. If another round of huge deficit spending does not work, we will have some big problems. As far as I am concerned, the Demorcrats AND Republicans have nothing to be proud of. What we have seen is wide-spread incompetence by our political and business leaders.
The political class will try to pin the blame on the “other” party. We should not allow this. We have a systemic problem that crosses party lines.
Cbass 01.16.09 at 12:55 pm
True dat Shift.
Ken44 01.16.09 at 9:21 pm
Wonder if we`ll see this:
http://www.nytimes.com/2009/01/17/business/17nocera.html?ref=business
John Williams 01.17.09 at 3:31 am
I am very concerned about these Cram Downs. It does not take a genius to realize that:
1. 20 people in a neighborhood of 500 homes get their mortgage reduced from $250K to $170K because they bought more house than they could afford (I am trying to be polite).
2. The guy next door to one of these cram downs has a good job and pays his bills but now the Cram Down homeowner has been rewarded for his inability to pay his mortgage.
3. The good guy next door the Cram Down has no savings (a huge percentage of Americans) so what does he do now that the Cram Down next door has been rewarded.
4. He walks on his mortgage. What has he got to lose? Absolutely nothing!
Another round of foreclosures that is exponentially larger than any to date. A spiral that you can’t get out of.
Am I missing something or are the people in Washington too busy lining their pockets to get this simple thought.
I am totally for getting the payment affordable for these people as some have just lost their jobs and are not dead beats but for heaven sakes change the payment by:
1. Lowering the rate to 1% if needed.
2. Extend the mortgage to 40 or 50 years (something they should be doing anyway to get the affordability index down to suck up the inventory).
Please , please , please do not lower the principle or we all lose.
I am not an economist but it seems to me they are making this much more complicated than it has to be. They have been doing 40 yr mortgages in CA for years.
ken44 01.17.09 at 8:15 am
—4. He walks on his mortgage. What has he got to lose? Absolutely nothing!—-
Unless the homeowner is deep underwater it makes more sense to ride this out as opposed to turning in the keys. Sure it’s not fair (cram downs) and many will not like it but I doubt it will cause another round of foreclosures.
—2. Extend the mortgage to 40 or 50 years (something they should be doing anyway to get the affordability index down to suck up the inventory).—-
I’m surprised this hasn’t already happened.
Jeff 01.17.09 at 1:34 pm
I’m not sure about extending the term of a loan. I remember seeing in an economics course how after about 30 years, an extended loan really doesn’t make sense. Wouldn’t this be the same thing as changing the loan to “interest only”?
John Williams 01.17.09 at 2:31 pm
My brother walked away from his house in the 80s because he was upside down and had no savings. Back then so many people did it that they did not even bother to kill his credit. So I have seen this second round of foreclosures first hand. And that was without Cram Downs.
A 30 year note at 5% is 1602 and at 40 yrs it is $1465. Make is 40 years and 3% and the PI is $1155. So if you do 40 yr and 3% you can make the payment doable for a lot more people.
The housing market would recover and they would get the lost equity back and could sell when they wanted to.
Letting the over extended people cut their principle is just WRONG on many levels.
If the government just let us all refy at 3% it would put $300 to $500 a month in most peoples pocket to spend. This would also reignite the economy…. Na lets give our tax money to wealthy bankers so they can buy more banks and acquire more wealth. Yea I realize that maybe some of this needed to be done but like all things Government it is over done and poorly supervised.
I wonder if any Economics books define Cram Down or if this is something that something a couple of Senators dreamed up over cocktails.
Cram Downs are just a bad idea…………………………
Paul 01.17.09 at 7:58 pm
In Arizona, for people who want to get out of their house, bankruptcy cramdowns don’t help because of our anti-deficiency statutes. Given a choice of declaring bankruptcy and having your principal written down (note: not likely all the way down to market value - just to what is affordable by the homeowner) versus just walking away with no consequences other than a credit hit - most people SHOULD walk away. Mainly because the foreclosure will only stay on credit for 7 years versus 10 years in bankruptcy and they will no longer be paying a mortgage on an underwater home.
This obviously doesn’t make sense for homeowners who truly want to stay in their house that they purchased. For them, the bankruptcy cramdown would make more sense out of the two options.
But in the absence of the cramdown option, the way Arizona laws are currently set up means all signs point to walking away as the responsible financial decision. I agree it’s not fair to the neighbors, but it is often the correct decision to make for many who are so far underwater that it will be 10 years or more before they are no longer underwater.
So, frankly, having the bankruptcy cramdown option will only create an avenue to stabilize communities by keeping people who want to be in their homes, in their homes. Yes property prices will fall, but they will anyway if nothing is done. Because there is still a 10 year credit hit for bankruptcy, it isn’t a costless decision to make for homeowners.
As I have said on this blog a few times before, partial principal write-downs (not all the way down to market value) for people who truly need it (you need a very good screening mechanism) will create the proper incentives to keep homeowners in their homes and to nudge banks/investors to face reality about the awfulness of their current mortgage portfolios and the need to unilaterally do something about it - i.e. write down principal voluntarily.
In the meantime, I predict more and more people walk away from their homes in Arizona because they are so far underwater and are losing their jobs and the banks refuse to do anything but delay foreclosures by 6 months with weak loan modification efforts (i.e., temporarily lowered rates and tacking deferred principal onto the back end).
A lot of people look at the option of continuing to pay $2000 a month on a mortgage for a house that is $100k underwater versus renting the same house for $1000 a month. Financially it makes more sense for them to save that extra $1000 a month for the next 7 years while their credit recovers and to use the savings to pay off their credit card debts.
Shift 01.17.09 at 8:46 pm
John Williams,
You state:
“If the government just let us all refy at 3%”
Question:
What do you mean by this?
The Fed is at an overnight rate of 0 to 0.25%. This is Zero Interest Rate Policy (ZIRP). In addition to ZIRP, the Fed is buying up long term treasuries. I just checked and the 10 yr yield is at 2.32 and the 30 yr yield is at 2.82. Since we are in a liquidity trap, ZIRP is not enough, and even buying up treasuries is not enough, so the Fed is also buying up mortgage securities. What else do you wish for the government to do?
The only way I can think of the government to get mortgage rates down to 3% is to just open up a nationalized bank and have the government offer these rates directly to the public. Is this what you have in mind.
I am confused.
It is difficult for me to know what you are talking about when you write things such as:
“A 30 year note at 5% is 1602 and at 40 yrs it is $1465. Make is 40 years and 3% and the PI is $1155. So if you do 40 yr and 3% you can make the payment doable for a lot more people.”
Without stating the amount of the mortgage, it is difficult to know if your numbers make sense.
John Williams 01.18.09 at 9:09 am
Shift sorry the mortage amount I used was $250K
I was talking about 3% mortgage. that would save everyone money and give them more money to spend. The Gov is nationalizing the biggest banks. Instead of bailing out C, BAC, JPM they could have used that money to reduce the pain on the real tax payer to refuel economy.
John Williams 01.18.09 at 9:46 am
Hey it is easy to second guess… Bottom line
1. Things wont get better till housing prices at least stabilize
2. Reducing principles amounts on mortgages will not stabilize the housing market.
3. It scares me big time that a bunch of Senators and Congressmen are the ones that are figuring out what to do.
At some point very rich people (people who can spend money regardless of the economy and or income) think it is a bottom they will start to buy and speculate again. Cram Downs don’t facilitate this either. The people that have money are sitting on it because they think we are not yet at the bottom.
As Paul points out things are now structured so that it is a better decision for those without any personal assets to just walk. They will keep walking until prices stabilize.
the government could have bought up all the bad loans and refied those people at 1% for 40 years and stabilized this situation more quickly for less money. Obviously I don’t know what those numbers are but they had to be less than the 350 Billion given to the bankers. This would have put a floor under housing immediately.
This is not my idea. My next door neighbor has been in the mortgage bus for 35 years and he pointed this out to me. It just makes common sense which is exactly why no one in Washington speaks of it.
Shift 01.18.09 at 5:57 pm
John Williams,
The bailout numbers don’t make sense unless you realize that the government is trying to save the derivitives market. Housing is secondary.
A good exercise: Ask yourself why AIG has received more than 150 Billion dollars. The only answer that makes any sense is that AIG was (and still is) a big player in the credit default swap, CDS, derivitive market.
That is the real game.
The government cares about saving the big fish. Small fish can fry.
Brian 01.18.09 at 8:16 pm
John
Your approach makes more sense than cramdowns, I agree. Obama has actually suggested rates as low as 3%. I agree that to be fair, everyone should have the opportunity to borrow at this subsidized rate (subsidized with tax dollars). It would help me, and anyone else with a mortgage. Anyone who owns their home outright, would be wise to cash out at 3% cost (LOL) adding a lot more low interest mortgages to the national balance sheet. But as goofy as this all sounds, it IS much more efficient to offer a flat rate program, than using the bankruptcy courts, or ad hoc negotiations with various bank agents to try and solve the problem. I also agree with John that it is much easier to stop the housing price decline by increasing demand through low mortgage rates than to “cramdown”, freeze foreclosures or otherwise limit supply.
To Shift: I make the point that the banking system in America has already been all but nationalized. All the mortgage market has been (95% as of last count is through GSEs). And most of the commercial market has been through the acquisition of C, AIG, BAC, and others by the Fed through TARP and other actions. All those deriative bailouts don’t come free. Uncle Sam drives a hard bargain. Sort of like dealing with the devil. Illustration: BAC now includes Merril Lynch, Countrywide and Wachovia after those questionable acquisitions. BAC just received another injection of capital last week and the Feds (we) got a huge bunch of 8% yielding preferred shares in return, diluting current common stockholders tremendously (especially since we taxpayers have the senior position to common).
I suppose, if the Feds keep taking back these preferred shares in exchange for capital infusions and debt guarantees and once the banks actually start making money again, the cash flow from all the preferred dividends can pay off the national debt (LOL). I just hope the Feds have a plan to sell the banks back to the private sector at some future, more golden time.
Roie 01.20.09 at 10:30 am
I hope Obama’s plans will work, even though I am in one of the most active real estate markets in the world, the competition is tremendous, Getting people back to being able to get a mortgage at a good rate will help.
Roie
http://www.nestseekers.com
Juan 04.18.09 at 4:20 pm
my comment is to how can Obama cant make a program where the banks can write down the principal on loans even with the drop home values so that every family can keep their homes and keep making monthly payments, me i been in my house over 7 years now my house went from a value of $300,000 plus to $179,000, that means i can’t sell, rent, or refinance, how many choices is my lender leaving me with? they dont want to help me keep my house, my payment went from 1000 to right now about 1800 adding taxes, we got a modified loan to an interest only which Downey Savings modified last year before they were taken over by the FDIC, we were asked to pay 1000 dollars for the modification and the olny loan we could get it was an interest only loan right now i dont see other clear choices for me im not getting a full paycheck due to furloughs what can i do? does anyone has an opinion or advice.
Mortgage with downey savings 04.18.09 at 4:22 pm
my comment is to how can Obama cant make a program where the banks can write down the principal on loans even with the drop home values so that every family can keep their homes and keep making monthly payments