John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... Do you support this program? Vote at the end of this blog.
Today , the Obama Administration is kicking off a $14 billion program to help consumers whose homes are “under water.”
In Colorado, an estimated 7,000 to 21,000 homeowners could have not only their mortgage rates lowered, but the principal amount of their mortgages reduced under the program, InsideRealEstateNews calculates. Nationally, 500,000 to 1.5 million homeowners current on their loans could be helped under the program. A home is considered under water when the house is worth less than the loan amount.
This is the first initiative targeting homeowners who are current on their mortgages, but have no equity in their homes. Basically, the program, which banks could choose to participate in, would take the loans off their books, after they write down the principal by at least 10 percent, and pass the risk of the default to the federal government. The loans would not only be lower, but would be refinanced into FHA-insured loans, allowing qualified buyers to take advantage of record-low rates. Borrowers would not only need to be current on their mortgage payments on their owner-occupied home, but would need to have a FICO credit score of at least 500.
Second mortgages reduced
The program also would require that second liens against homes be written down so that the total mortgage debt is less than 115 percent of the home’s current value. The government, under the program, would make partial payments to banks to help write down the loans. Second mortgages have been a huge obstacle is refinancing mortgages in the past, as the second-lien holder often has been reluctant to play ball and modify its loans, as it had little to gain.
The new “short refinance” program is being launched at time when the Home Affordable Modification, or HAMP, is not coming close to helping three million people, as originally hopes. Since HAMP began, Colorado has consistently accounted for 1.4 percent of the total – 9,453 in either the active trial or permanent modification portion of it in July. If that ratio holds true for the new program, it could conceivably help just under 21,000 people in Colorado, if the 1.5 million homeowner goal is met. Increasingly, homeowners who find themselves under water on their loans, are debating whether to do a “strategic default,” in which they unload their home through a foreclosure or a short sale, rather than paying on a home that could be purchased today at a much lower price.
Experts divided on its merits
Colorado experts are divided on its merits.
“Well, I think for the short-term it will have some positive impact,” said Byron Koste, executive director emeritus for the University of Colorado Real Estate Center. “Long-term, it is not my favorite thing. It is just an artificial balancing act, rather than a natural balancing act. Some good people are currently hurting and it will help them. And I do not like that the banks will be getting a break. There are consequences for making bad loans, and so this is really another way of bailing them out. But the economy is struggling, and the Obama administration is trying to find a way to get the economy to feel better and this is one of the things they’ve come up with.”
Mike Rinner, of the Genesis Group, which tracks housing along the Front Range, said that wile the “housing market certainly could use all the help it can get, in principle, I think it is a bad idea.” The government is setting aside up to $14 billion from the Troubled Asset Relief Program, or TARP, for the latest program. But it is time to rein in spending, Rinner said. He said the government needs to show fiscal constraint, as throwing money at problems does not solve them. “The government needs to learn that it must spend less tax-payer money, not more of it,” he said.
“I don’t even think this is going to help,” Rinner said. “It’s not going to give the housing market a boost. What is going to give the housing market a boost is some sound economic policies coming out of Washington, D.C. What this is another Band-Aid on a gusher.”
Homeowners gain
But Jeff Bernard, a long-time Realtor who now is primarily a real estate and business consultant, said this program sounds like the best one yet.
“This program sounds very logical to me,” said Bernard, principal of Bernard Real Estate Analytics and a WSI Internet Marketing Consultant. “What I like about this program is that it seems that it will directly benefit the homeowner. What I didn’t like about the earlier TARP bail-out of the banks, is that it did not help the homeowner, but the money just flowed to the bank’s bottom line. Banks can opt-in or opt-out out of this latest program, but it seems they may have more of an incentive to participate this time. And it seems the closest thing yet for something that will be user-friendly to homeowners, so to speak.”
Gwen Jasper, a broker with 8Z Real Estate, one of the sponsors of InsideRealEstateNews, also said that the program sounds as if it has merit, and she would like to learn more about it.
“I think the Denver market is quite narrowly being impacted by the downturn, compared to coastal areas, where homes have fallen by half,” Jasper said. “If we had some kind of program to keep people in their homes, instead of more foreclosures, I think the housing market and the economy would come out ahead. This program definitely sounds like it would kind of help to motivate people to stick around in their homes, until they gradually see some increase in value – but not the craziness we saw when the market previously to levels that were just unrealistic and unsustainable.”
Key: Cut the red-tape
Still, she hopes the latest program does not become bogged down in a bureaucracy.
“Honestly, I am not completely aware of all of the guidelines that come into this latest loan modification program,” Jasper said. “But with previous programs, some of the biggest problems were there were so many hoops to go through that people just kind of gave up on the banks, and the banks kind of gave up, because they were so over-whelmed. This sounds like a step in the right direction. I just hope that is is not bogged down in red-tape.”
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Some American taxpayers may not be happy about their tax money being spent on lowering the mortgage rates and writing down the second mortgages on the properties of people who borrowed too much. It’s like giving a reward for bad financial choices. And once again, the banks don’t suffer for making bad loans. We all started out with no equity in our homes. The object is to gain equity when possible. It’s always been a gamble. There has never been a guaranty that the value of one’s real estate asset will increase in value. When one signs a loan agreement, one needs to fulfill it regardless of the fluctuations in the value of your property. So, those who kept their debt level under control get no government money, those who gambled with their real estate get government money. Not a good decision.
If this can provide an alternative to foreclosure or short sale, then I think it’s a good idea. If a “short refinance” will prevent an under-water homeowner from abandoning their property, then we all win by not having another short sale or bank owned property on the market driving down our property values. I’m a Realtor, and specialize in short sales. Unfortunately, most homeowners don’t seek programs like this unless they become delinquent on their home loans. At that point they would not qualify for this program. In order for this program to work, I think the banks would have to inform their borrowers that this program exists. Do you think they would do that? I think it could be a win-win-win if the banks would provide this information to the homeowner, while the government/tax payer soaks up the loss. If they would help, then together I think we could level out this market fairly soon, and actually start seeing some appreciation again.
Are we also making sure that these people don’t have umteen thousands in their 401k’s or other investments? Are we going to verify that they don’t have a $70,000 boat sitting somewhere or a mountain cabin? These are people that most likely financed and pulled out tons in cash. Now they’re upside down. Why is that my problem? Sure, they could just walk away; that’s one of the problems with our society: no sense of obligation. Tell them to first use their OWN assets to pay down the loan. Enough said.
Bravo and well said. It is too bad those of us who are above water and always have been are footing the bill for the SOB’s that eat drink and are marry then shove the bill down my throat. Sadly if we refuse to “contribute”(pay taxes)it is us that wind up in jail. It’s not Bush or Obama, it’s congress and big business sticking it to us over and over just because they can. The Roman Empire got rid of their senators (elete class) too late and so will we. REAL changes is needed but no REAL leaders are out there. Palin, Beck etc. – give me a break their just willing to say anything for a buck but have no comprehensive program or the leadership skills to pull it together.
It is actually very simple. Fewer foreclosures equals lower inventory. Lower inventories allow prices to become stable.
The taxpayer gains through retention of equity or lower mortgage payments. I lean toward the suggestion of Bill Gross of Pimco who proposed that a program be established where any homeowner current on their payments could walk into a lender and receive a new loan at 4%. Immagine how much money you would toss into the economy if you could reduce your rate by a point or two, with the concurrent reduction of your mortgage.
Overall, I like it. When the mortgage crisis first erupted I kept thinking that a lot would be solved by substituting direct, fair government loans for the much less borrower-friendly loans that had been made. That might have averted a lot of the borrower hardship and fear that contributed to the recession.
Direct, fair government loans with some equity would be the end product here. I would prioritize it, though, by enrolling the borrowers with the highest current interest rates first, and making enrollment in the program a borrower choice, not a lender choice. I also think each current borrower should be eligible only once, because of cost and risk to the government.
Sure it’s a rescue program and the government would be giving (gasp) some borrowers a bonus or a break. But strategically this is a group of people that needs a break, people who probably haven’t benefited at all from home purchase tax credits, and who are probably still driving their clunkers. By maintaining their ownership of their current homes this break has a good chance of contributing to economic health and stability in the long run.
This is the first program that makes any sense and that may appeal to homeowners who have lost equity because of the major market correction we’ve been going through for the last few years. Marybeth, we didn’t all start out with “no equity.” Many people bought homes with sizable down payments which gave them instant equity in their homes. These people are currently underwater through no fault of their own. The new program allows people who are current on their mortgages to regain some of their equity.Being upside down causes homeowners to not be able to make a needed move, say, caused by a job transfer or better job possibilities elsewhere.
I agree with Doug Jenner who thinks it ought to be a borrower choice not a lender choice. But I don’t see that happening in this life. The financial industry has a stranglehold on lawmakers, so we’re stuck with the banks who volunteer to take this very nice federal write-off on their balance sheets.
Some of us homeowners actually took out mortgages that we could pay back. Some of us, even when we added to the loan in order to remodel, still stayed within our means. Now I find out I am the fool for not taking every penny that was offered when I refinanced, because now I’d be upside down and the government would bail me out! Silly me for not being more fiscally irresponsible. What a dummy I am. I keep forgetting, the bigger screw up you are, the more likely the government will have a program to give you other people’s money.
Would somebody tell these Bozos to QUIT TRYING TO FIX EVERYTHING!!! (Particularly with OUR money!)