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April 2, 2010


In a previous blog, we mentioned how the Obama Housing Entitlement Project that spent $90 billion to save foreclosures failed.  There is no word on the status of the $90 billion that was set aside for the mortgage re-modification program.  However, we can likely agree that the money was spent on something.  Government money dedicated to spending programs is as good as gone.
Well, the administration has not given up on directly inserting itself between distressed homeowners and their mortgage lenders.  The administration announced the modification program will have two objectives.  First, the plan is supposed to help homeowners who want to refinance but can’t because they owe more than 80 percent of their home’s value.  The second is to modify two to four million loans for homeowners who can’t afford their mortgage payments.
The plan offers incentives to mortgage providers to encourage those two objectives.  I, for one, cannot understand how this is much different than the first failed housing plan. 
According to the New York Times, there are two key qualifications.  First:
“To qualify, your monthly housing payment needs to exceed more than 31 percent of your gross monthly income (that means before any payroll deductions are made). Keep in mind that your “payment” includes more than just your mortgage’s principal and interest. It also includes real estate taxes, all related home and flood insurance, as well as home association and condominium fees. It does not include any second mortgages or other loans outstanding.”
Once again, this sounds to me like the more irresponsible you are, the more qualified you are to take out a government-assisted loan.  What makes it even stranger is that the less likely you are to afford the house, the MORE likely you are to get a new mortgage.  Don’t forget, this mortgage is going to be subsidized by the taxpayer.
What’s even stranger is that the administration claims this will only cost $14 billion as opposed to the $90 billion they said last year’s failures will cost.  Additionally, according to Nuwire Investor:
“Under terms of the new program, banks participating in the Home Affordable Modification Program, or HAMP, will be forced to consider writing down the principal for eligible borrowers whose mortgage debt is more than 115% of the current value of their homes. The principal would be reduced in stages over three years if the borrowers keep their payments current.”
So, we have a new acronym, HAMP.  In addition to that, banks are being forced to considering writing down principal.  The only question I have is will they have a choice to foreclose if they want to or must they want to refinance?  In my opinion, the solution is a little simpler.
The best way to solve this crisis is to get people who can’t afford their homes into housing they can afford.  In addition to this, I believe lenders who walk away from their homes and keep their homes in good condition should have their credit score reduced by less than the standard foreclosure.  This incentivizes distressed homeowners to walk away, leaving their home in good condition and avoiding further decline in housing values in their communities.
In addition to this, Bank of America has already instituted its own program to refinance without government money.  This program was started before the Obama administration announced its taxpayer-backed mortgage bailout plan.  This exemplifies the fact that the mortgage industry can handle this on their own without the government.
Another thing that lenders should be able to do is give the homeowner the option to lend on a short-term lease.  While making the bank the landlord can become messy, it provides a stream of some type of revenue that the banks would not get if the homes sat unoccupied or the foreclosure process was frozen by the government.
In thinking about the housing crisis, we need to think about a solution that preserves the taxpayer from unwarranted costs, keep the banks solvent, and provides everyone with access to affordable housing.  The solution that the Obama administration is providing forces banks into a corner, puts taxpayer money at risk, and fails to provide the accountability that is needed to solve this crisis.

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