Realty Check

Is This A Housing Rescue Plan Or Just Ridiculous?


Given how things went on the Floor of the House yesterday (not so well for Chairman Barney Frank and his bill to put specific conditions on the remaining TARP money), it is still uncertain what exactly the remaining $350 billion of TARP funds will do to turn the housing market around.

The Obama administration, in last minute hard-lobbying for the funds, promised a significant amount of the money would go to "a sweeping effort to address the foreclosure crisis." Larry Summers, Director-Designate of the National Economic Council, wrote in a letter, "$50 to $100 billion." He also said some of that money may be used in conjunction with Chairman Frank's proposals to "strengthen the Hope for Homeowners program".

Among other things, Chairman Frank, in his bill, seeks to direct some of the TARP money to expanding the FHA's Hope for Homeowners program. This program has been a failure from the start because it requires lenders to write down principal on loans in exchange for a refi of the loan to an FHA-insured product. Lenders have been unwilling to lower the value of the loans, so there have been pitifully few applications.

Frank's legislation would change the requirements, first and foremost, allowing the lender to write the loan down to 93 percent of the value of the home, as opposed to the original 90 percent. So they don't have to give back quite so much. It also reduces the 1.5 percent annual premium to between .55 and .75 percents. I can't say I like any of these, because it just makes the loan that much more risky, and the reduction in premium gives the government less money to cover all those loans that will, inevitably, redefault.

But stuck into the last paragraph is the part I really don't like.

Under "Administrative simplification," the bill "eliminates borrower certifications regarding not intentionally defaulting on any debt," and "eliminates special requirement to collect two years of tax return." Let the games begin! It basically says that borrowers don't have to prove that they didn't intentionally default on the loan and they don't have to prove income.

This makes my blood boil, because it is opening the door ever wider for anyone to go in there and get free money, which by the way I'm paying for.

Here's the problem. One in six homeowners are now underwater on their loans. That means they are paying mortgages that are larger than the current value of their homes. So you could argue, well, the value will go up in a few years, so just sit tight, pay your monthly bill, and you'll be back in the black soon.

Well, not so much for the bulk of new loans and homes purchased during the housing boom. These were bought in the hardest hit states, like California, Florida, Arizona and Nevada. Those states have seen far deeper price corrections than the national average (-18 Percent from the peak). It could take these homeowners 10-20 years at normal home appreciation rates, to get back to even. A lot of these folks are already mailing in the keys, choosing the "deed in lieu of foreclosure" option, but I can guarantee you that given the option to get a very low fixed rate FHA loan AND get their loan value written down to 93 percent of the home's value, they'll claim in a heartbeat that they can't afford their loans, whether they can or not, simply because under the new requirements they wouldn't have to prove it.

That's just free money in the form of home equity.

Look, I'm not completely naïve. I know that housing needs saving, and the necessary evil will be some form of government bailout that will inevitably reward some borrowers for gambling on their investment and losing. I get that. I hate it, but I get it. I just want to limit the damage is all.

Giving borrowers who were irresponsible in the first place another chance is one thing, but giving them a free ride is another.

Questions?  Comments?