Obama’s ‘Responsible’ Reno Homeowners: Are They?

CNBC.com

As part of his “To Do List,” President Barack Obama visited Val and Paul Keller on Friday. The White House described them as “responsible” homeowners who owe more on their mortgage than their Nevada home is currently worth.

They owe $168,000 on their mortgage, but their Reno home is currently valued at $100,000.

The president is doing so to, “help demonstrate a concrete and tangible example as to why this broader push [to refinance] is so important not only for millions of Americans but for our economy,” said Shaun Donovan, secretary of Housing and Urban Development, in a conference call with reporters before the event.

During that call, Donovan used the words “responsible homeowners” more than a dozen times, in describing whom the administration’s proposed refinance programs should help.

It is not the Kellers' fault that home prices in Reno are down 52 percent from the peak, right? The Kellers bought their house 14 years ago, and they have not been late on a mortgage payment, according to Donovan. They were able to take advantage of the newly expanded government refinance program through Fannie Mae and Freddie Mac for severely underwater borrowers, and they are in fact putting some of their savings on the monthly mortgage toward paying down principal.

But were they responsible?

The Kellers bought their home before the height of the housing boom. The trouble I’m having understanding this whole scenario is that the median home price in Reno is actually 7 percent higher today than it was 14 years ago. If the Kellers had a “responsible” loan, that would be a 30-year fixed, in which case they should have paid at least some principal on the loan over the last 14 years. And didn’t these “responsible” borrowers, the Kellers, put some money down on the home?

We went looking: According to Washoe County records, the Kellers purchased their home in June 1998 for $127,000. So why do they have, according to the White House, a $168,000 mortgage?

White House officials now confirm to CNBC that the Kellers did a cash-out refinance in 2007, when their home had appreciated to $250,000. Again, it’s not illegal, but are these the “responsible” borrowers that the administration is looking to help? They took out a $178,000 loan, using the $51,000 to pay down debt on the family construction business, so Paul could retire. Had they not taken that money out, and continued paying on the original mortgage, they would not be underwater today.

“This is a family, first and foremost, that has met their responsibility, remained on time with their mortgage and used their equity in their home in a way that so many Americans do, to send their kids to college, support a small business or save for retirement,” said Donovan, whom we contacted after learning of the refinance. “They deserve the chance to benefit from these record low interest rates because they have met their responsibilities.”

Another administration official familiar with the Kellers’ case says the couple were responsible because despite the incredible runup in home prices, they did not take all the equity out of the house. “She did not use her home as an ATM in the sense that we saw during the crisis, because she didn’t cash out all of the equity leaving her no cushion. She had a 71 percent LTV (loan to value ratio), or 30 percent equity in her home. That is by almost any definition a very responsible position to be in,” he added. In the past, Obama has criticized borrowers, who at the peak of the housing bubble, pulled money out, referring to it as using their house as an ATM.

LTV, Donovan and the other administration official claim, is not a minor issue. So it seems they are defining “responsible” as a borrower who maintains an equity cushion in the house, even when that house price has nearly doubled in just eight years.

“This was truly 100 year flood, and so lots of people who had 20, 30, 40 percent equity in their homes now find themselves underwater,” says the White House official, who also commends the Kellers for not walking away from their mortgage.

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