Homeowner Mortgage Rescue Plan: Unanswered Questions
Lots of people are upset about the $75 billion that President (“watch me sink the markets”) Obama wants to transfer from responsible homeowners and taxpayers to “at-risk” homeowners.
I haven’t yet solidified all of my feelings about it, but they are mostly negative. My thoughts range from “what did you expect” to “mildly annoyed” to “let’s put signs up in the yards of everyone who is bailed out.” Where my feelings end up will depend in large part on the answers to these questions:
2. Why throw so much money into a plan that cannot rescue the unemployed homeowner? Yes, this plan may help a relatively few homeowners who carelessly put themselves into an exotic loan product that has caused their payments to inflate. But now the more emergent problem is the unemployed. They can’t afford to make any payments. Not even Obama has proposed subsidizing those who have no income – yet. So with this problem unsolved, the intended boost to overall property valuations is likely to be a complete dud.
3. Will we throw mortgage rescue money at homeowners overloaded with other consumer debt? A key feature of the plan is to use a combination of lender and taxpayer money to reduce mortgage payments so that the homeowner has a 31% debt-to-income ratio. What is not clear is whether this includes other consumer debt, such as car loans and credit cards. The plan does state that those with a total debt-to-income ratio of 55% or greater will be subject to mandatory “credit counseling.” So what? If the total debt-to-income ratio is going to be crammed down with taxpayer money, we are basically going to be subsidizing payback of a broad spectrum of consumer debt, by extreme shrinkage of the mortgage payment. My attitude is that any homeowner who takes taxpayer money to reduce a mortgage payment should be required to surrender their credit cards. I’m just as upset with this scenario as I am with bank CEO’s taking TARP money on top of huge bonuses. We are capping their income if they take TARP money. Let’s also cap the use of consumer credit by those taking mortgage rescue money.
4. Why are we paying homeowners to do what they already agreed to do? The most offensive part of this plan is that the taxpayers will be giving rescued homeowners $1000/year for five years just for paying on time! And these payments are to reduce the principal amount of a mortgage that has already been modified with taxpayer dollars. I suppose this means that if they are late half-the time, they only receive $500/year. Anyone who needs to be incentivized this way just to make timely re-payment of borrowed money probably does not deserve our help to begin with.
5. Will rescued homeowners drain their equity? One purpose of the plan is to reverse the negative equiy situations for many homeowners, such as by making those annual “good homeowner” $1000 balance reduction payments. So what happens when these rescued homeowners build up equity with taxpayer help? Will they be permitted to take out home equity loans or second mortgages to drain it right back out again? That is the kind of behavior that contributed to this mess. If the government is going to intervene to this extent, it ought to create barriers to recidivism.
6. Where is the evidence suggesting that any of this will work? To me, this is the biggest unanswered question. Usually when someone announces plans to spend $75 billion, they at least make an effort to support the basis for the expenditure with some research or statistics. Not so in this case. I think I know why. Back in December I wrote about the extremely high re-default rates for homeowners who had their mortgages modified to lower their payments. 58% had defaulted – again – after only 8 months. I don’t believe the data has improved at all. In fact, here is the most recent quote from the Comptroller of the Currency on this subject:
One very troubling point is that, whether measured using 30-day or 60-day delinquencies, re-default rates increased each month and showed no signs of leveling off after six months and even eight months,” said Comptroller of the Currency John C. Dugan. “This trend of increasing delinquencies underscores the need to understand why these modifications have not been more sustainable.”
No one on the Obama team mentions this. If you combine that high re-default rate with all of the other homeowners who can’t pay at all because they are unemployed, where is the stability coming from? I am afraid that this plan is nothing more than a crusade by wishful thinkers.
If you are interested in another viewpoint and some high energy questions on the mortgage bailout plan, here is Rick Santelli of CNBC’s Squawkbox:
Mr. ToughMoneyLove wants answers to some of these questions. How about you?