Tuesday, February 7, 2012

Obama Releases New Housing Program

Video embedded below.

"Basically, it sounds like an extension of the bailout, only now for people who bought high and had to watch as values dropped. The reach of the program would not keep people at risk from losing their homes, but simply allow people to lower their interest rates on the existing principle in most cases, which means it doesn’t make them any less underwater, either. In fact, it might make matters worse:

To be eligible, borrowers would have to be current on their mortgages, not having missed a payment in at least six months. They need a credit score (FICO) above 580, must be employed, and must have a conforming loan (between $271,050 and $729,750 depending on their location). No appraisal would be necessary, according to officials.

Estimates are that the plan could help 3.5 million borrowers in addition to the 11 million expected to qualify for the existing refinance program for those with Fannie Mae and Freddie Mac loans (HARP). The one sticking point could be the mortgage insurance premiums charged by the FHA. If rolled into the loan, they would put a borrower further underwater.

“To use taxpayer dollars to bail out the few who are current and don’t need payment assistance but are underwater is ludicrous and worsens their equity position,” says JT Smith of Aristar Funding.

Note that I said most cases. When the principal is more than 140% of current home value, the program would force lenders to write down the principal to 140% … which still leaves homeowners underwater and reduce assets for lenders, making it more difficult for them to lend money. The administration will argue that this helps the lenders by getting rid of “risky” loans. They’re only “risky” if the homeowners can’t make the payments, though, and even if that were true, lenders could simply choose to do this on their own. Not only that, but because FHA — an outright government agency — would take on the loan instead of Fannie/Freddie or a completely private lender, taxpayers would also on the hook for that same “risky” loan for which taxpayers had no prior risk at all.

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