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This is Pure Genius
By JLP | April 9, 2008
Here’s a novel idea:
1. Buy a house.
2. Finance it with an adjustable-rate mortgage (ARM), interest-only ARM, or some other mortgage that will get your initial payment down so you can afford the house.
3. Don’t worry about the mortgage reset because the value of the home will continue to increase and you can just refinance into another mortgage before your payments go through the roof.
4. If, for some unforseen reason things don’t work out and the value of your home sinks to below what you owe on it, the bank will magically adjust the principal balance down so that it reflects 90 – 97% of the current market value of your home.
Sounds silly, doesn’t it? Well, that’s the plan now in the works by the Bush administration as part of an expansion to the original mortgage assistant plan. According to a front page article ($) in today’s Wall Street Journal:
The Bush administration plans to expand a government program that helps struggling borrowers keep their homes, as it moves to respond to the housing crisis amid more sweeping, costly Democratic proposals.
The expansion — to be announced Wednesday — is designed to help about 100,000 homeowners, including many who owe more than their houses are worth, reduce their monthly payments, administration officials said. The expansion involves encouraging lenders to write down the value of the loans, they said. In return, the risk of default would be shifted to the government.
Then, a little further down into the article this little tidbit appears:
The expansion would allow the FHA to insure a new mortgage if a lender voluntarily writes down the mortgage principal to a maximum of either 90% or 97% of the new value, depending on the borrower’s risk profile. If a loan and home was originally valued at $110,000, for example, and fell to $100,000, lenders could reduce the principal to either $97,000 or $90,000 to qualify for FHA insurance.
This is just getting worse and worse. Where will it end?
Topics: Housing Market, Mortgages | 17 Comments »
April 9th, 2008 at 5:56 pm
I sure home when Canada falls apart like the USA is that we don’t follow these kind of idiotic plans.
April 9th, 2008 at 6:58 pm
There’s a different article on the front of WSJ today which also saddens/irritates me, entitled “Subprime Lender’s Failure Sparks Lawsuit Against Wall Street Banks”.
Quoting: “Virgil Magnon of Oceanside, Calif., says that in 1997 he saw the ads and began buying ABFS’s notes — in effect, lending it cash. He received regular interest payments for about seven years. But when ABFS went under, Mr. Magnon, who is 81, says he was out $761,000, or 80% of his liquid assets. “Small investors like me are not very savvy,” says the retired aerospace contract administrator. “My primary interest in investing was to raise enough money for catastrophic medical problems down the line. You could call that greed, but I don’t think it’s greed. It’s trying to get more for your money.”
I’m irritated because people aren’t taking responsibility for their own actions. Nothing new in litiguous America.
I’m also saddened that these people apparently don’t understand the concept about “putting all your eggs into one basket”. 80% of one’s liquid assets into one investment that you didn’t fully understand? Gimme a break!
Oh, and I agree with your exasperation with the Bush plan. Down the slippery slope we slide.
April 9th, 2008 at 7:21 pm
Ludicrous. There’s no reason people should be able to live in homes they don’t pay for.
April 9th, 2008 at 7:29 pm
This makes me so mad I want to smack anyone who is responsible for the creation, implementation or supporting this plan. And to those irresponsible buyers, I wish they would go to jail for a few years. This might be good for them because they’d have a roof over their head, no? Oh, and let the lenders suffer losses for their irresponsible lending policies.
April 9th, 2008 at 7:45 pm
I hope we Brits will not suffer as much you guys in the US are. Big mistake that you elected the current president..twice.
April 9th, 2008 at 7:54 pm
A better solution would be to bring back debtors’ prison – if people realise that they will go to jail for not paying their debts they might be more willing to take responsibility for their actions.
On a slightly more serious note, the Bush plan stinks. Not only does it shift responsibility for bearing the losses from the borrowers (who should be primarily responsible) but it shifts the burden onto those less culpable such as investors who purchased shares in the lenders, CDOs etc and, above all, the tax payer. Remember that until only recently, most lenders benefitted from “buy” recommendations from brokers and many CMO/CDOs had investment grade ratings – making it quite reasonable for investors to put their money into such investments as part of a diversified portfolio. If borrowers think someone else is responsibile for their stupidity and greed they have access to the world’s most litigous court system.
From a legal perspective, the banks can tell the government they are not willing to write down their loans (why should they risk a law suit from their shareholders or the holders of CMO/CDO repackaged mortgages?) If the goverment wants to pass legislation to force banks to forgive some of the debt, then that will amount to expropriating property and the banks (or the holders of the CMO/CDOs) will be entitled to compensation from the tax payer.
April 9th, 2008 at 7:55 pm
Peter Schiff just suggested the same thing on his radio show. Peter is the author of ‘Crash Proof’.
The bailout plan is crazy… they can’t bailout everyone. Who is going to pay for this? Me. This is illegal. This is robbery. The Federal government is now in the business of stealing money.
April 9th, 2008 at 8:23 pm
Shorty,
I saw that article too and thought the same thing!
April 9th, 2008 at 8:24 pm
This is insane! Here in Australia we’re doing the opposite, raising interest rates & slowing things down to prevent inflation – seems much sensible to me than offering even more people with no capacity to pay ropes to hang themselves with down the line.
April 9th, 2008 at 9:21 pm
Although I’ve been out of community banking for almost a decade now, I give a lot of credit to community banks. Generally, they didn’t participate in the 0% equity loans. I realize 20% down on a house means you have to save for awhile, but, then the government doesn’t have to redistribute someone else’s tax dollars to bail out a sub-prime industry. Real equity can cover for a multitude of problems.
April 9th, 2008 at 9:31 pm
I’m just waiting for the government to forgive all student loans…that might actually be useful for me. But I’m afraid we couldn’t accept that, it’d be ridiculous.
April 9th, 2008 at 9:56 pm
Sandra Leegh (#5), you apparently don’t realize that Democratic plans would be far worse as far as a bailout is concerned. But what do you care? Anything you can blame on Bush is a good thing, right? It rained today, it’s Bush’s fault, right? Wanker.
April 9th, 2008 at 10:26 pm
I dont think they should write down the principal balance of the note…Thats just giving away free money.
At most, perhaps they should be given a reprieve and the rate they were originally qualified for on their ARM (and theoretically should have been able to make payments on) becomes the effective 30 year fixed rate. The homeowner should then be able to continue to make payments no problem, right?
And in the cases where they can’t, because a mortgage broker fudged the numbers to sell the loan, well perhaps they and the bank who underwrote the loan should be forced to pay the difference in the payment between what the homeowner can pay and what the actual payment is.
Just a few radical ideas to rant about…Probably not realistic as they have too many complexities to actually be realistic. In reality though, I dont agree with the plan, but we do need a way to slow down the foreclosure rate. Foreclosures are bad for everyone…tax revenue isn’t coming in, they make neighborhoods look bad, chances for vandalism increase, etc.
Tim
TheMoneyKings.com
April 10th, 2008 at 8:34 am
What is the big deal? A huge amount of our taxes goes to support lazy scumbags who don’t want to work or think for themselves and expect to spend their lives living suckling at “Big Government Mommy’s” teats.
Oh yeah….this MUST be the fault of President Bush.
To Sandra: I thank God every day that Abraham Boice enlisted in 1776 and risked his life to get us out from under the tyrannical rule of YOUR government.
April 10th, 2008 at 8:56 am
Sandra,
Actually the original idea for this plan was floated by Rep. Franks (D-MA) who thought we could bail everyone out using FHA if the banks wrote down overpriced homes to 85% of market value.
The banks probably looked at that idea and said “Hmmm 85% recovery of our money is OK, let’s see if old W would bump it up to 95% or higher”
That’s where we’re at now. Accusing George W of an original idea, who do you think you are?
April 10th, 2008 at 10:14 pm
We are paying for other people’s greed or stupidity one way or another unfortunately. Be it with our tax money or with our net worth going down. Some unlucky people are paying with their jobs. Others cannot afford to buy anything. In my area, a young couple could probably only afford a one bedroom condo if they both work and earn above-average salary; a co-op if the do not. OK, I shouldn’t complaint, I made a bit of money by selling my old condo for a lot more than what I paid for it (sold a bit too early, though), but the fact is, the current problems would affect all of us one way or another.
A husband of a co-worker works for a mortgage company. He is a mathematician not a mortgage broker. The company announced recently, they’ll lay off about half of all employees. Now, this guy is not poor or young so he probably could afford to just retire. But there are so many people working for these companies who aren’t close to retirement or have money.
Wish I could believe this plan would help the economy though. More likely it’d be a huge waste much like the rebate (ok, I am not objective, I didn’t qualify). It’ll be accompanied by even more waste like sending everyone letters to tell them about the program.
April 14th, 2008 at 12:57 am
I wish I was dumb enough to get myself in an overpriced house that I can’t afford. I could then blame everyone else and get the government to pay for my stupidity.
Damn me for being smart.