If you are one of the millions of homeowners who have had your share of loan
modification runarounds, survived HAMP hell, and still hope someone, anyone, will step up and help rescue you from unscrupulous mortgage servicers, who continue to push through foreclosures, deserved or not --hold on...a brand new foreclosure assistance program is being unveiled today.
But before you go and get too excited, wide-eyed and hopeful that this latest plan is the answer to your prayers, and our economic woes, you might want to read between the lines... Read the below guest blog contributed by Jim Malmberg;
New Bank Bailout Launches Disguised As Credit Help For Troubled Homeowners
By any account, the Obama administration's efforts to get banks to renegotiate mortgages with borrowers have been an abysmal failure. By the end of July, there were only 421,000 homeowners who had managed to get permanent loan modifications from their banks out of more than 1.5 million trial modifications and nearly 3.1 million eligible loans. The vast majority of application either didn't qualify due to income or other restrictions, withdrew from the program or were thrown out because they failed to continue to make payments even after their loans were restructured. Today, the administration launched a new program that is likely to make matters significantly worse.
Through July, the loan modification program called HAMP had cost taxpayers $75 Billion. As misguided as the program has been, it at least had some reasonable income and expense requirements for borrowers. The new program throws those requirements out by incenting lenders to make the same types of risky loan decisions that led to the housing collapse in the first place.
Under the administration's new initiative, which is targeted at people who owe more on their homes than they are worth, banks will have to agree to reduce the amount of principle owed on a loan by 10%. Once that agreement is reached, then the borrower can't exceed can't exceed a loan-to-value ratio of more than 97.5% on their first loan, or a total of 115% of the value of their home on both the first and second loans. Put another way, the government is incenting banks to lend money on homes that still won't be worth the amount owed on them, and then the government will guarantee the loan for the bank. That means that if the borrower defaults on the new loan, the government will insure that the bank takes no further losses by backing the loan with your tax dollars. Borrowers will only need to have a credit score of 500.
As bad as this sounds, it is not actually the worst part of the program. A portion of the program is aimed at the unemployed. Yes, the government wants to use tax dollars to insure that not only the unemployed can get a new loan, but that the banks will be insured against losses by giving them a new loan.
Again, this is not the worst portion of the program. That is reserved for the fact that banks will be able to choose which borrowers to include in the program. If you think about that for just a second, this means that banks will be incented to place borrowers with the highest risk of default, and whose mortgages are not currently insured, into the new program. At worst, they will then be required to take a 10% haircut on their loan. That is a far cry better - at least from the bank's perspective - than taking a much larger loss on the loan and having to foreclose on the property.
This does a number of things to the housing market that are not healthy. It prevents the market from correcting quickly as the government attempts to pick the winners and the losers in the housing market; a move that is likely to fail but which will certainly needlessly drag out the process. It also places Billions of dollars of tax money at risk for absolutely no reason. Given the horrible statistics of the HAMP program, there is every reason to believe that default rates on loans within the new program will be significant.
The program will also artificially keep housing prices propped up - another housing bubble - for a period of time as it is likely to add several months of home ownership to people who are destined to lose their homes anyway.
The current recession - actually a depression - started with a freeze in credit markets that was caused by risky loans. That spread through the economy like wildfire, leading to high unemployment and foreclosure rates. This new program encourages the same type of behavior that led to the crisis in the first place. The administration is trying to sell the program as a way for people to save their homes. Unfortunately, it is really a program designed to insure that the banks that made risky loans in the first place, along with the investors who purchased them, don't face any more losses. Instead, they are going to pass those losses off to taxpayers and hope that we are all just too stupid to notice.
Well, here is a news flash. We've noticed
Jim Malmberg
Director, ACCESS
But before you go and get too excited, wide-eyed and hopeful that this latest plan is the answer to your prayers, and our economic woes, you might want to read between the lines... Read the below guest blog contributed by Jim Malmberg;
Image via Wikipedia
New Bank Bailout Launches Disguised As Credit Help For Troubled Homeowners
By any account, the Obama administration's efforts to get banks to renegotiate mortgages with borrowers have been an abysmal failure. By the end of July, there were only 421,000 homeowners who had managed to get permanent loan modifications from their banks out of more than 1.5 million trial modifications and nearly 3.1 million eligible loans. The vast majority of application either didn't qualify due to income or other restrictions, withdrew from the program or were thrown out because they failed to continue to make payments even after their loans were restructured. Today, the administration launched a new program that is likely to make matters significantly worse.
Through July, the loan modification program called HAMP had cost taxpayers $75 Billion. As misguided as the program has been, it at least had some reasonable income and expense requirements for borrowers. The new program throws those requirements out by incenting lenders to make the same types of risky loan decisions that led to the housing collapse in the first place.
Under the administration's new initiative, which is targeted at people who owe more on their homes than they are worth, banks will have to agree to reduce the amount of principle owed on a loan by 10%. Once that agreement is reached, then the borrower can't exceed can't exceed a loan-to-value ratio of more than 97.5% on their first loan, or a total of 115% of the value of their home on both the first and second loans. Put another way, the government is incenting banks to lend money on homes that still won't be worth the amount owed on them, and then the government will guarantee the loan for the bank. That means that if the borrower defaults on the new loan, the government will insure that the bank takes no further losses by backing the loan with your tax dollars. Borrowers will only need to have a credit score of 500.
As bad as this sounds, it is not actually the worst part of the program. A portion of the program is aimed at the unemployed. Yes, the government wants to use tax dollars to insure that not only the unemployed can get a new loan, but that the banks will be insured against losses by giving them a new loan.
Again, this is not the worst portion of the program. That is reserved for the fact that banks will be able to choose which borrowers to include in the program. If you think about that for just a second, this means that banks will be incented to place borrowers with the highest risk of default, and whose mortgages are not currently insured, into the new program. At worst, they will then be required to take a 10% haircut on their loan. That is a far cry better - at least from the bank's perspective - than taking a much larger loss on the loan and having to foreclose on the property.
This does a number of things to the housing market that are not healthy. It prevents the market from correcting quickly as the government attempts to pick the winners and the losers in the housing market; a move that is likely to fail but which will certainly needlessly drag out the process. It also places Billions of dollars of tax money at risk for absolutely no reason. Given the horrible statistics of the HAMP program, there is every reason to believe that default rates on loans within the new program will be significant.
The program will also artificially keep housing prices propped up - another housing bubble - for a period of time as it is likely to add several months of home ownership to people who are destined to lose their homes anyway.
The current recession - actually a depression - started with a freeze in credit markets that was caused by risky loans. That spread through the economy like wildfire, leading to high unemployment and foreclosure rates. This new program encourages the same type of behavior that led to the crisis in the first place. The administration is trying to sell the program as a way for people to save their homes. Unfortunately, it is really a program designed to insure that the banks that made risky loans in the first place, along with the investors who purchased them, don't face any more losses. Instead, they are going to pass those losses off to taxpayers and hope that we are all just too stupid to notice.
Well, here is a news flash. We've noticed
Jim Malmberg
Director, ACCESS
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excellent! well put and I couldn't agree more. However the $75 billion figure is a bit off. The truth is actually much more pathetic. True that $75 billion was allocated to the program, but it was not used. A mere $250 million went to helping homeowners, another $3 billion was allocated to the unemployed homeowner program that was part of the reform bill. the rest is still available.