Realty Check

For Housing, Hope Should Not Cloud Hard Reality


I’m all about the hope, awash in it in fact, and no, I’m not being facetious. How could any American, even those of the non-winning party, not feel some sense of positive change, despite the fact that our president-elect, in accepting his new job, tried to manage expectations out of the gate?

But hope shouldn’t cloud reality, especially when it comes to housing.

As policymakers and economists try to wrap their collective expertise and expectations around the possibilities of the Obama presidency, a heightened sense of urgency is now focused on mortgage rescue plans and housing stimulus. That is not unexpected, but everybody take a breath. Many are rushing to get something done before the change in power, and ideas are being floated that could hurt more than they help.

I read today, on a blog, about ruminations from the CEO of Assured Guaranty Ltd, regarding a government subsidy plan for troubled borrowers. His idea is for a three-year federal subsidy that would cost $441 billion. A troubled borrower could get their mortgage fully subsidized for three years but would then have to pay it all back, with interest in five years. The idea is that five years from now they could sell the home for more than the loan or refinance at amounts that would allow repayment. Isn't the teaser rate how we got into trouble in the first place??

The home builders are also out with a plan to stimulate housing. They want first a home-buyer tax credit of $10-20,000 available to all home buyers that would not have to be repaid. On top of that they want the government to subsidize a below-market rate 30-year fixed rate loan—2.99 percent! For homes purchased through June 30, 2009. The interest rate would increase to 3.99 percent for homes bought in the second half of 2009.

Then there is the FDIC’s Sheila Bair, still pushing with the Treasury for her agency to guarantee mortgages in exchange for lenders and servicers to modify loans and/or write down principal.

The concern now is that with all these plans, homeowners, some in trouble and some not, are beginning to think it might be a good idea to stop paying their mortgages. Why not? If there are so many ways to take advantage of the government and the lenders, why be left out of the party?

A reader wrote into the blog, telling of how he lives on an upper middle-class cul de sac in Plano, TX, and how several of his neighbors are now saying they are going to stop payment on their loans. None of the neighbors are in any particular financial trouble.

"I think everyone is going to be very surprised when the data demonstrates how many foreclosures are voluntary walkaways due to price declines. Having a 60 day DQ on your credit file in return for getting a chance to negotiate a large reduction in principal balance as well as better interest rate is a risk/reward that is going to appeal to many, many homeowners."

I would just caution all those getting ready or already taking part in the winds of change to batten down the hatches. Fixing the housing crisis is going to be a long and painful task with no easy fixes. Giving some homeowners a free ride is not the answer, now matter how much we all hope for a quick resolution.

Questions?  Comments?