Homeowner Mortgage Rescue Plan: Unanswered Questions

February 22, 2009 by  
Filed under Debt and Credit

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:

1.  Will those who took out “liars loans” benefit from this plan?  It’s one thing to rescue folks who were just stupid with their money.  It’s quite another thing to provide taxpayer help to those who procured a loan by misrepresenting their income.  We haven’t been told if or how this issue will be addressed in the plan.  I’m afraid no one in government really cares because lying is a fixture in the political landscape anyway.

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?

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5 Responses to “Homeowner Mortgage Rescue Plan: Unanswered Questions”
  1. K-money says:

    One of my coworkers also works for a major bank and will be attending training next month on how the bank plans to implement their part in this plan. I am very curious what the bank’s instruction to their employees is going to be.

    “barrier to recidivism” – as much as I want a loan modification for myself (I am WAY too underwater to qualify right now, and besides, I can afford my payments so I don’t “deserve” help under the plan) I am leery of helping people out of this mess for fear that they will not have really learned any lessons and just get into trouble again. I don’t have the answers, either.

  2. Brian says:

    Great Questions Mr TML. #3 is really scary, because what will stop people from jumping into more debt via CC’s or Auto’s just so they can join the rescue plan?

  3. Rick Beagle says:

    There is a tendency as Americans to assume that people -who are struggling with their bills and their mortgages- are somehow completely responsible for that predicament. We look at their lives and say such things as: 1) you didn’t spend within your means; 2) you didn’t take advantage of educational opportunities to retool your skills; and 3) you are in a job that you should have realized would be phased out (due to technology or whatever). Many of these comments certainly sound good and do a lot in reaffirming our superiority for our good planning versus their obviously flawed thought processes.

    Unfortunately, in the traditional market sense there are a large enough number of people out there that seem to reaffirm these notions that we sometimes forget that it isn’t always true. The collapse of the RV industry in the course of one year is not something that a reasonable person could have predicted. Of course we could browbeat the community for not diversifying their businesses, but other than making us feel good, there really isn’t a point to that.

    Which brings me to my point, what percentage of the people being assisted with their mortgage are simply in need of a “bridge” to help them get out of a situation that they simply could not control? I mean, what about the people who did everything right, but still managed to get into a bind. Wouldn’t it be prudent to invest in these folks and provide them with a helping hand?

    But what about those statistics concerning re-default? I am not sure that those numbers are applicable in the current economic turmoil. I do know that if we do not stop the economic bleeding, those numbers will not get any better.

    So what do we do? Do we keep letting people bear with the brunt of the economic turmoil unassisted while we pump billions into banks and other big businesses? Who, I might add have already shown resistance to change? Do we heed the markets, and reverse course?

    Who knows? But in my own little world, I must say watching wall street and the banks scream bloody murder about this bill puts a little smile on my face. I know it’s wrong, but somehow it makes me think they have a “bit more skin in the game”. Even if it is an illusion, it is worth every tax dollar to me.

    Absurd, but there is my opinion for what it’s worth.
    Rick Beagle

  4. Four Pillars says:

    Great post TML – you will like my post on this same subject. It is scheduled for tomorrow morning.

    Good point about draining equity…


  5. kitty says:

    I am on the fence here. I have my doubts as to this banks ability to prevent foreclosures; I am not really happy as anyone about bailing out those irresponsible. I also have a question about the “cram down” provision: if the principal balance is reduced, shouldn’t there be some provision to say that if the property value goes back up at some point in future, and the owner sells for more than the new reduced principal, shouldn’t it be the bank to receive the money and not the homeowner? Why should the owner pocket the profits from this arrangement?

    At the same time, foreclosures hurts the neighbors. This is especially true for condos. A lot of attention was paid to houses and how the foreclosed homes aren’t good for neighborhoods. But the effect can be much worse on condos. In condos, several owners’ not paying common charges may result in a significant hike in common charges for the perfectly responsible neighbors or in an assessment. Given big enough hike, and neighbors can end up having to struggle to come up with money. Also, banks owning significant percentage of units don’t really care about improvement or maintenance, so they may vote against needed repairs. Then there is our whole economy. So I am not really sure: if I can get myself to believe that this bill would help the economy, I’d be for it. I’d love to be optimistic, but I have my doubts.

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