Another bailout
October 24th, 2011 (01:49 pm)In this article entitled “Regulator throws lifeline to underwater borrowers”, another plan to help the housing industry is unveiled. See http://www.reuters.com/article/2011/10/24/us-usa-housing-idUSTRE79K6JY20111024
The truth is, this is more of the same failed plan of the past with a couple more bells and whistles.
There is currently a refinance program available for certain borrowers that make it less expensive and often easier to refinance their mortgage. The new “plan” makes that current program even more lenient since many borrowers don’t currently qualify. Simply put, it has not solved the problem. This is obvious by the continued decline in home prices and glut of excess housing inventory, but on the surface this new plan should help more struggling borrowers.
Under the new plan the requirements of refinance will be that the borrower have a job or some source of income and that the last 6 mortgage payments were made on time. We don’t yet know whether the borrower will have to document the income or if there will even be any qualifying requirments of the income. There are two big difference this time though we do know of.
First, there will be no limit how far underwater the mortgage can be–it could be a mortgage of $300,000 on a house valued at $100,000. Great, right? The current program limits the mortgage to no more than 125% of the home value. The problem is, and I have seen this firsthand, it doesn’t matter how low the rate is on these properties. Nobody wants even a 0% loan on a home that’s worth $50,000 less than the mortgage! Many homes are in a much worse position, too. While it’s estimated that there are 11 million mortgages underwater, and this plan could only help up to 1 million of them, the past has shown that these government programs are not actually implemented according to plan because lenders are reluctant to do the loans. Banks just do not offer the refinance program the way (as leniently) as the government intended. And afterall, it will take the lenders getting on board to actually make the loans available to make any program work. Why haven’t banks been lending?
That’s where the 2nd big difference comes in. Lenders will no longer be required to “buy back”, or basically be responsible at all, for loans that go bad after the government buys them. This has been the sticking point in the past and the main reason for lenders’ reluctance to help people out. Until now just the people with good credit, enough income to afford payments, and (for the most part) some equity in the property can refinance. The result, then, is the government plan facilitating these loans is being paid for by taxpayers and redistributed to people who don’t truly need help.
This new plan provision will extend credit, from the federal government, to struggling borrowers who are underwater with no recourse on the lenders who make the new loans. This appears to be another bailout. Banks’ loans that are so far underwater and have little hope of being paid off are going to be paid off (refinanced) with new money from the federal govrenment while the lenders now have no vested interest in whether the new loans pay on time or not. Effectively, we’ve just bailed banks out of the underwater loans.
Oh yeah, and there’s profit on the new loans once closed, too!
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