Obama’s Housing Plan May Leave Many Homeowners Out in the Cold
By Don Miller
Associate Editor
Money Morning
Although the new Obama administration housing plan is expected to help about 9 million struggling American homeowners avoid foreclosure, there are also concerns the proposal could actually extend the country’s economic woes by prolonging the freefall in housing prices.
Critics also fear the plan won’t help tens of thousands of borrowers in the most-battered housing markets who won’t qualify because the values have fallen too far.
The housing plan unveiled by the Obama administration Wednesday is intended to help 9 million struggling homeowners avoid foreclosure. But there are serious doubts about whether it will help tens of thousands of borrowers in the most battered housing markets who won’t qualify because their values have sunk too far.
There also are other aspects of the plan that critics contend may actually extend the credit crisis and keep the housing market from finding a natural floor from which to rebound.
Tumbling home prices are at the center of the global financial meltdown, making the success or failure of the administration’s housing plan a major part of its effort to end the deepening economic recession.
Obama’s ambitious $275 billion plan to halt soaring foreclosures nationwide offers investors, banks and bill collectors financial incentives to keep Americans in their homes by modifying the terms of already distressed mortgages.
But even an administration background briefing that was conducted in anonymity in order to ensure frank discussion made it clear that the plan is far from a panacea, according to McClatchy Newspapers.
The program has two parts:
- The first part calls for a collaboration with lenders to induce them to change loan terms for as many as 4 million homeowners.
- The second part calls for as many as 5 million homeowners to be able to refinance their mortgages so that they have more-affordable fixed-rate loans.
Under the first part of the plan, a loan-serving company would modify a mortgage so that no more than 38% of a homeowner’s monthly after-tax income is devoted to monthly mortgage payments. The government then would step in to share the cost of the mortgage so that no more than 31% of the borrower’s income was tied up in the payment.
To lower the payment, the servicer would first reduce the interest rate to as low as 2.0%. If that’s not enough to hit the 31% threshold, they could extend the loan out as far as 40 years. If that’s still not enough, the servicer would forebear loan principal at no interest.
Critics think that this mortgage subsidy disrupts the natural process of letting the market find the floor for home prices.
"Not only do these gimmicks prevent home prices from falling to the market-clearing levels that would give private lenders the confidence to loan, but the continued specter of subsequent government-mandated modification will keep lenders out of the game," said Peter Schiff, the president of investment strategist Euro Pacific Capital and a frequent contributor to Money Morning.
Others complain the plan also doesn’t require servicers to reduce mortgage principal.
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“For underwater loans, if you don’t write down the balance to be less than the value of the house, people still have an incentive to default," Richard Green, the director of the Lusk Center for Real Estate at the University of Southern California, told U.S. News & World Report.
The other pillar of the plan offers homeowners the chance to take advantage of today’s low interest rates by refinancing if their mortgages are held by Fannie Mae (FNM) or Freddie Mac (FRE).
However, the refinancing plan only helps borrowers who owe up to 105% of their home’s current value. That makes it unlikely that severely "underwater" borrowers will be able to take advantage of the loan modifications, which are supported by $75 billion in federal funding.
Of the nearly 52 million U.S. homeowners with a mortgage, almost 14 million, or nearly 27%, owe more on their mortgage than their house is worth, according to Moody’s Economy.com.
Hard-hit markets in California, Florida, Nevada and Arizona hold the most underwater households, but homeowners in struggling cities, like Detroit, and other rust-belt enclaves will also be left out. Even suburban houses in some of the healthier markets – such as Denver and Washington D.C. – have dropped substantially in value.
For a homeowner who borrowed $380,000 and now has a house worth $270,000, "I just don’t know what you do with that," Jared Martin, a mortgage broker in Bethesda, Md., told The Associated Press.
Mortgage servicers also won’t be able to modify mortgages if the terms of their contracts with the investors who own the pools of mortgages won’t allow it. These pools of mortgages, called mortgage-backed securities, are the so-called “toxic assets” that are at the heart of the global banking meltdown
Meanwhile, to balance the financial carrots and incentives in the plan, the U.S. House of Representatives is expected to pass legislation giving bankruptcy judges a powerful new stick – the leeway to modify the terms of certain mortgages to keep banks from moving to foreclosure.
As reported previously by Money Morning, that law – known as “cram down” in bankruptcy parlance – could backfire and even cause the mortgage market to seize up, as investors stop buying mortgage-backed securities out of fear a judge could unilaterally change the terms of the deal the securities were created around.
News and Related Story Links:
- McClatchy Newspapers:
Obama offers bold housing plan to limit foreclosures - Associated Press:
- Housing plan aims to help 9M, but leaves out many
- U.S. News & World Report:
Obama’s Loan Modification Plan: 7 Things You Need to Know - Money Morning:
Bankruptcy Law Changes Part of Obama’s $275 Billion Housing Plan. - University of Southern California Lusk Center for Real Estate:
Web Site.
Pingback by As the Economy Worsens, Experts Call for Obama to Focus on the Fundamentals on 9 March 2009:
[...] will stimulate lending activity for small businesses and consumers. The $75 billion “Making Home Affordable” program is supposed to assist 9 million homeowners with financial hardships to avoid [...]
Comment by Jared on 20 June 2009:
My wife and I bought our home during the peak and even with a large down payment are severely underwater after only being in the home less than two years. On the advice of our loan officer we took an ARM due to high interest rates for conforming 30 year loans. We were told we could refinance after one year to traditional 30 year loan. Then the market crashed and we could not refinance. Our loan is not due to reset for several years and we are current, however we fear the possibility of future hyperinflation and are desperately trying to conform to a 30 year fixed.
I have contacted Freddie Mac, the securer of my loan for instruction. I was told that I would qualify for the president’s new hope for Making Home Affordability Plan. I also checked the making homes affordable website. Freddie Mac instructed me to contact my lender Country Wide now Bank of America. I was told they have tools such as loan modification as well as interest rate reduction that would allow me to fall within the 105% loan to value target. We have interest only conventional loans and both are from Freddie Mac. One of our loan is suppose to reset in 4 years and the other one resets in 7 years ballooning to a higher interest.
Bank of America refused I was then told to call hope for home owners. After spending many agonizing hours, days, and weeks with Bank of America they informed me that we don’t qualify for their Making Home Affordability and there are no programs that qualifies us to modify our loan. Then they sent me to home retention department. Home retention stated that they were not helping anyone who was “current” on their mortgage. If I wanted help I had to stop paying on my mortgage. This was suggested by at least 3 different people at Bank of America!!!
I then turned to HOPE, I am currently enrolled in the services of MMI (money management international). They sent an outreach to Bank of America (Countrywide) on April 3rd. Bank of America has denied receiving as of April 23rd. I am now contacting both Freddie Mac and MMI again.
My wife and I recently attended the Making Home Affordability HUD Counselor Workshop Seminar. The Hud counselor went through our finances and told us that we are qualified for the Making Home Affordable Plan and the Bank should offer us this plan. We then called Bank of America again asking for all the right words based on the HUD counselor had instructed us to do. Bank of America denied us to be qualified for the plan again! The Customer Service on the other end of the line was so rude and will not work with us; she said there are no plans that fit our situation.
The counselor informed us that Bank of America are denying people and pretending that they don’t have such plan in their system to offer to the customer; because the bank are so backed up and they are forcing people to foreclose in their home. So then people would not have a choice but to take the banks offer which is not in the Obama’s Plan.
My loan to value is about 118% due to all the foreclosures in my neighborhood. After checking around many of the homes that have foreclosed have been so called no doc loans by institutions similar to Bank of America (Countrywide).
My own experience with this institution has been negative to say the least. I have been passed on, lied to, and have been given questionable advise by nearly every agent (not pay your mortgage to qualify?). Bank of America has taken several billion dollars in TARP money. Unless the current laws are changed or more pressure is put upon this institution the foreclosures will continue. People like me who are current on their mortgages will soon decide if holding on to a property that may never recover may not be worth it. I am the kind of person a bank should want to keep but now must make a financial calculation. Whether or not to take the hit on my credit now or later.
Countrywide/Bank of America is an institution that cannot recover with all of its bad loans. As painful as this may, nationalization of Bank of America may be necessary. Temporary wiping out all the share holders maybe the best hope for people facing the foreclosure and will force the bank to comply with Obama’s Plan.
With the current leadership structure at this institution and the amounts of bad debt on their books they cannot be trusted to follow suggested policy now, or in the future. Bank of America the poster child for bad no doc loans.
The president must hold this institution to task and if they refuse, force the issue.
Comment by David on 29 June 2009:
Jared is correct. Bank of America (our loan was previously Countrywide) is denying people that CLEARLY qualify. We are current, but barely. Our loan payment to income ratio is much higher than 31%. Our escrow payment went up $500 per MONTH this year, and my wife is no longer working.
If you read Obama’s plan, we meet every criteria in it. BofA says they don’t offer a program to anybody current on their loan, even though it’s part of the stimulus package.
Unbelievable. BofA will end up being the downfall of a million people that this plan should have helped.
Comment by Robert Milles on 19 July 2009:
after trying to get some helps i realized that Bank’s are crooks, period, this plan will only give them more profit, and the little
guy….who cares?
Comment by Robert Milles on 19 July 2009:
It’s very simple, people who are upside down in their mortgage, who put at least 20% down payment, have financial problem and live in the property as a primary residence should get help, period!
Comment by Alesha on 1 August 2009:
I had the same issues with Bank of America as David and Jared described above, it is sickening. Such deceptions needs to be recognized. I think I may call my news channel.
Comment by J BALLEW on 9 October 2009:
I would like to let people know that Chase Mortgage and, Fanny Blue are telling me the same lying sorry excuses as the other lenders are telling their Mortgage holders. I think they all have this same retoric they give to everyone. I have been trying for a year to get a loan Modifacation since March of last year when the ” Stimuless Package” to help homeowners came out. I have also been told that because I have a Fanny Blue Loan” which I Hade never herd of but,my loan papers all say its a FHA loan, because of this i’m not elegible for any
modifIcation help although I meet all the qualifacations and them some espacilly for a medical hardship. I also have been told because i’m not in Forclosure they cant help me. This is just another way to justify not helping those who “DESERVE” to be helped,people who did put down 20% and are current and haven’t missed payments and want to stay in their homes might as well might as well forget getting any help.Its obvious who really got all the so called Help!