Homeowner Aid Program Details Announced

The Obama Administration is launching its homeowner aid program today. This is a multibillion dollar program that will likely do little to improve affordability of homes, but is rather intended to keep certain areas that have been hard hit by the real estate bubble collapse from being eviscerated further.

The idea is to allow homeowners to get their mortgages modified so that they do not have to pay more than 31% of their gross income per month for the mortgage. Borrowers would have to meet certain qualifications.

Of course, the most troubling aspect of all is that the Obama Administration believes that Freddie Mac is qualified to audit compliance with the program. Since when has anyone actually audited Freddie Mac (or Fannie Mae) and held those at the entity responsible for their handling of lending practices that started and exacerbated the credit meltdown and toxic paper crisis?

One of the keys of this program as per their handy-dandy fact sheet is that the program is supposed to, and I quote "Support Low Mortgage Rates by Strengthening Confidence in Fannie Mae and Freddie Mac". How can anyone have confidence in either of these entities when neither has been held accountable for its past practices that led to this mess, let alone have had their former and current executives grilled by Congress for their fiscal irresponsibility and imprudence.

I'm sorry, but low mortgage interest rates will not come from strengthening confidence in either entity, but by allowing banks to lend to those borrowers who are actually qualified to repay the loans, rather than dishing out loans to those who are incapable of repaying, even with modifications.

Loan modification doesn't help those who become unemployed. Loan modification doesn't help those who took out grossly irresponsible mortgages on homes that they could never afford even under good economic times, to say nothing of the turbulence we experience now.

I recently refinanced my 30-year fixed rate mortgage from 6.625% to 5.375%, all without the help of the government. There are many people who are unable to do so because their homes are under water (loan worth more than the value of their home), and the Obama plan claims that they will address this situation, but I'm dubious that the solution will make homes more affordable since it will actually serve to prop up markets that are still correcting to more affordable levels for prospective qualified buyers.

The plan also claims that it will not benefit speculators, but the problem is that many of the foreclosures and those markets that have the most people underwater are in states like Florida, Arizona, Nevada, and California where speculators bet large on real estate prices running up, and the collapse has put a huge number of properties on the market. Relatively stable real estate markets like many parts of Northern NJ do not have the rampant speculation that the aforementioned states did, and the Obama programs will not have the intended effects.

In fact, as we've seen with prior loan modification programs, 50-60% of modifications redefault because they cannot afford to own these homes. It actually draws out the time in which the markets correct and makes it more difficult for everyone in the process. Keep in mind that more than 90% of homes are not in default and that claims that 20% of homes are underwater doesn't mean that those 20% are under threat of default either. It just means that those homeowners can't use their homes like piggy banks to take out additional loans and cannot easily resell their homes without ponying up additional money to satisfy their debts. For people who aren't about to sell their homes, this isn't an issue. It becomes an issue for speculators and those who have to sell for job relocations, deaths, and other life changes.

Oh, and there's one area in which this plan falls woefully short. It doesn't take into account the fact that many people are finding themselves facing foreclosure or being forced from their homes because of higher taxes and fees - local and state property taxes that have gone literally through the roof.

UPDATE:
Is the solution worse than the problem of foreclosures? 62% of all foreclosures are in just four states - Florida, California, Arizona, and worst of all - Nevada. Note also the following:

Different data comparisons can yield different impressions. Here we compare foreclosures to housing units to arrive at a foreclosure rate. Comparing foreclosures to mortgages is more common and yields a higher rate as well as leaves out owner-occupied housing where mortgages have been paid completely (32 percent of owner-occupied dwellings). This method also diminishes the importance of rental housing (32 percent of housing nationwide and 46 percent of housing in central cities) on which there are fewer foreclosures. By comparing foreclosures to housing units we include all housing. This measure, however, understates the burden of delinquent mortgage payments on lenders. With 51 million mortgages in 2007, one million foreclosures would be two percent of all mortgages, a major increase from the previous norm of 0.4 percent of mortgages starting the foreclosure process from 1997 to 2006.

So, 98% of all mortgages are not in foreclosure, but we're supposed to treat the 2% as though the sky is falling.