Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government’s latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.

The “Deed for Lease” Program lets borrowers who don’t qualify for loan modifications transfer their property to Fannie Mae in exchange for a lease. Borrowers-turned-tenants will pay market rents, which in most cases are lower than the cost of mortgage payments, and might be offered extensions when their leases expire.

That’s what I read in today’s WSJ. You can read the article here.

The supposed goals of this program are to:

1. Allow people to stay in their homes by giving them rent payments that are lower than their mortgage payments.

2. Keep foreclosed houses from flooding the housing market with excess inventory.

3. Possibly allow Fannie to profit from the eventual sale of the homes when the real estate market recovers.

Fannie will hire a professional management company to handle all the rental details.

Basically, what this means is that since our government essentially owns Fannie Mae, our government is now a landlord. So much for property rights. Kinda scary if you ask me.

What do I think should happen?

Allow the market to address the housing situation instead of artificially propping it up until who knows when. Attack the situation like you do when ripping off a bandaid…one quick motion.

Increasingly, homeowners with good credit and no late payments are making what appears to be a strategic decision to walk away when their home’s value falls below what’s owed.

Beth sent me a link to the article on MSN that is the source of the above sentence (The Rich Bail Faster on Mortgages).

More from the article…

The better their credit rating, the more likely homeowners were to default. The trend is most pronounced where prices have fallen furthest: Florida and the West, especially California.

What’s astonishing (maybe it shouldn’t be) is that lots of these homeowners can AFFORD their payments but are choosing to default because their home is worth less than what they owe.

The article mentions that walking away from a debt was taboo in the past. I think people are doing it now because they look around and they see everyone else getting bailed out and figure, “What the hell…I’ll do it too.” You can’t tell me that when you look around and see banks getting bailed out (while still paying themselves bonuses) and strapped homeowners getting bailed out, that it doesn’t affect the way you see things.

Does that make it right to walk away from an obligation even though you can afford to pay? NOPE! Such behavior—whether ’strategic’ or not—is shameful. Why don’t they do the same thing with their cars? If you buy a new car with a loan, you are underwater the second you drive that car off the lot. Does that mean you should walk away from the car? Why is a house any different—aside from the fact that we were led to believe that housing prices always go up?

Sorry for the rant. It’s all Beth’s fault!

I wanted to point out one of the stories in the article:

Insurance adjustor Ginger Shields says she tried for years to qualify for a home loan. After a decade and a half of renting, she and her husband sought a loan in 2003 from a TD Banknorth office in her north-central Vermont town of Barre. The bank’s loan officer said their credit score of 550 — below the level considered healthy — wouldn’t allow them to qualify.

A local mortgage broker said the same thing, recalls Ms. Shields, now 59 years old. The couple had no savings, and were saddled with credit-card and other debts. They had liabilities she says they didn’t know about, including debt on a totaled car they thought the insurance company had paid off.

TD Banknorth wouldn’t discuss the specifics of Ms. Shields’s application. But the rejection of someone who can’t show their ability to repay a mortgage “is more common than not in the state of Vermont,” said Stephen Kaminski, a senior vice president of mortgage products.

Ms. Shields and her husband went to a nonprofit mortgage-assistance program, NeighborWorks. There, a counselor guided them through paying down their debt and fixing their credit report. They were frustrated at missing out on houses they liked and tempted by mortgages they saw advertised on TV and the Internet, but heeded their counselor’s advice to hold out for a loan they could afford.

Eventually they raised their credit score to 670, says their counselor, Harry Sanderson. In 2006, he helped the couple buy a three-bedroom, ranch-style house on a quarter-acre lot, through a Department of Agriculture program that offers mortgages to lower-income households in rural areas.

Ms. Shields’s husband died last year. She continues to meet her monthly payments. “With my husband gone, I really think I would not have been able to keep the house” under earlier loans they had considered, she said.

I understand this woman’s frustration but surely she has to understand that her decisions in the past put her in the situation where she couldn’t afford to buy a house. My wife and I were in the same boat. Fortunately, we bought a house we could afford and we worked our butts off, paying down our credit card debt. We lived in an unremodeled house for 8 years before we had the money to make improvements.

The article also mentions that Vermont missed out on the housing boom because of their standards. My question is what good is a ‘boom’ if the underlying economics aren’t there to support the boom? I think what we saw with the internet boom and then with the housing boom, was the errosion of standards, which leads to unsustainable booms.

One last thing I want to mention about this article is that Vermont made mortgage broker’s a fiduciary for the borrowers and not the lenders. This was huge.

I know not everyone can do this but you have to applaud the effort of this woman.

Avoiding Foreclosure? It’s a Piece of Cake

It’s refreshing to see someone not waiting for someone to come help her out even though she has a legitimate reason to need help (due to her contractor).

Be sure and read the comments that go along with the article.

Despite what some of the negative reviewers say about the book on Amazon, this is a great book. Some of the Amazon reviewers gave it a one star because too many other people gave it a 5-star! Others said things like, “Nothing new here.” Well, it’s supposed to be an account of what happened—a historical book. Anyway, I thought David did a great job of condensing the events that led up to the subprime mortgage crisis into a book that is actually enjoyable to read. I found myself underlining lots of passages and adding notes like, “WOW!” and, “This is crazy!” I even stopped several times and read things to my wife—something I don’t do very often.

The book opens with a discussion of how Federal Reserve’s reaction to the Technology Bubble’s bursting and 911 led to low interest rates for far too long, which spawned the housing bubble. In other words, cheap money played a significant role in creating the subprime crisis. It is amazing how one thing leads to another. With the subprime crisis, you could almost see the progression of events.

The book begins with the bursting of the technology/internet bubble and the Fed’s reaction to both that and 9/11. Remember, the Fed uses to the Fed Funds Rate to stimulate and to cool the economy. The Fed had driven up the Fed Funds Rate to 6.5% at the time the NASDAQ was peaking in March 2000 and in response to the bubble bursting, drove them back down to 3.5% by September 2001. Then, in reaction to 9/11, the Fed took the following actions:

These lower rates, which affected mortgage rates, inspired people to refinance their homes in record numbers. As the author points out, some people were refinancing to get a lower interest rate and a lower payment. Others were refinancing and taking their home’s equity and using it to buy things.

All this cheap money also meant that fixed income investors weren’t making very much money. This led Wall Street to look for other ways to find yield, which they found in the bundling of mortgages into Collateralized Debt Obligations (CDOs). NOTE: I’m summarizing here so I’m leaving out a lot of details which you can find in the book. These CDOs were sold all over the world to yield-hungry investors.

Wall Street’s demand for mortgage-back CDOs inspired mortgage brokers to make more loans. Why? Because these brokers were assured of a buyer for any mortgage they wrote. It was to their benefit to write as many mortgages as possible without any consideration to the buyer’s ability to actually pay the mortgage beyond 90 days (according to the book, the mortgage broker faced losses if the buyer defaulted within the first 90 days of the mortgage).

Competition among mortgage brokers and bankers drove standards downward. Mortgage seekers could get by merely stating their income. They could also get a mortgage for 95% to 100% of the purchase price of the home, which was unheard of just a few years before. They were also using all sorts of different loans in order to purchase their homes. By 2006, 40% of all loans made were of the subprime and alt-A category, which are much riskier than a traditional prime mortgage.

People were also using adjustable-rate mortgages and other mortgages with low teaser rates that adjusted upward after a couple of years. Of course, all this action drove housing prices skyward. People had no fear of their mortgages adjusting upward because if they did, they would just refinance into a newer mortgage and get their payments back down to a manageable level.

Those were the main characters in the mortgage crisis but the book also describes other characters who played significant roles.

• The rating agencies that blessed some of the mortgage-backed CDOs with AAA ratings even though they were loaded with subrpime mortgages. Unsuspecting investors purchased these AAA rated securities, thinking they were getting a safe investment. WRONG!

• AIG, which insured a lot of CDOs but didn’t have the necessary reserves to cover all the claims.

7bull; The Fed turning a blind eye to what was going on. Greenspan claims there was nothing he could have done to prevent the crisis or that the prevention of the crisis would have been worse. Who knows…

Like I said earlier, I greatly summarized the events and characters of the subprime crisis. For more detail—but not too much to bog you down—read And Then the Roof Caved In*. If you’re like me, you’ll find yourself scratching your head in amazement at how all this was able to take place.

GIVEAWAY…

Now, for those of you who made it all the way through my review, I’d like to give you the opportunity to win a copy of the book (on me). All you have to do is leave a comment. I will select one commenter and send them a copy of And Then the Roof Caved In*. Just remember my two rules (yes they are the same two rules I have always had):

1. You must be a resident of the USA or Canada (I won’t mail internationally).

2. You can only enter one time.

Good luck and thanks for reading!

*Affiliate Link

Okay, I guess the optimistic way to state that would be to say that the mortgage payment reduction program has had a 75% success rate (still that’s a “C” if you were using a grading scale). There’s also no guarantee that more recipients won’t fall behind. I think we would have been better off to just let the market work this mess out and allowed those who couldn’t afford their homes to move on with their lives instead of dragging this mess out longer.

The good thing we can take from the article mentioned above is that the housing market appears to be stabilizing. Let’s just hope that unemployment doesn’t hinder a recovery.

For the two-thirds of American families who own their homes, a house is their biggest asset. The lower house prices go, the less wealthy they are and the less they can or will spend and borrow. For home builders, the lower home prices go, the fewer new homes they will build and the fewer workers they will hire. And for many American banks and other financial institutions, mortgages, mortgage-backed securities and financial instruments that rest on mortgages remain a huge headache. The lower house prices go, the less these loans and investments are worth and the weaker the foundations of the financial system are.

Although I understand the importance of housing prices, I’m concerned that as a nation we will return to our former ways of using home equity as a piggy bank for consumer spending. From what I have read it’s clear to me that that was what led us to this predicament in the first place.

I guess my real question is…

What’s to stop this from happening all over again?

I mean, we have laws against fraud, but they weren’t enforced when people lied about their income in order to get bigger mortgages. What’s to stop this from happening again? Clearly we can’t rely on homeowners or potential homeowners to not take on too much debt. Nor can we rely the ethics of the mortgage brokers and bankers to not allow customers to take on more debt than they can handle since they [the mortgage brokers and bankers] are worried about the potential customer getting financing from a competitor.

I’m also concerned that so much focus is placed on consumer spending. Yes, we need consumer spending but shouldn’t we be more concerned with the incomes necessary to support that spending? We saw in the last eight years that consumers were simply borrowing money in order to spend.

Maybe we should have some standards in place. Things like…

• No more than 30 – 35% of your income should be spent on housing.

• Your income MUST BE VERIFIED!

• You need at least a 10% down payment when purchasing a house.

• No more than 80% (or maybe even less) of your equity can be withdrawn via a home-equity loan.

I would even like to see new homeowners attending homeownership classes or something of that nature. Purchasing a home is a HUGE decision and people should be getting their education from someone other than those who stand to gain from their decision.

Those are my thoughts? Do you have anything you’d like to add?

Two years ago we stopped investing in our 401k and we began paying thousands against the principal on our home. We only have $1,500.00 left to pay and the property is ours and we didn’t lose our a$$et$ to the stock market. We don’t have to worry about losing our home to the bank.

Our money isn’t tied up in unstable companies that could fail in a second with no warning. We are debt free and will now be able to live comfortable lives without worry. There’s something to be said about that don’t you think? If all of your money is placed in the stock market, which most likely it is. You most likely are worried that you’ll never get back what you just lost in the latest crisis. I don’t have that worry and in 11 years, I will have saved approximately $500,000.00 that I probably would have sank into the stock market and lost. Now that is a $500,000.00 gain in 11 years.

Can you beat that?

I don’t think so…

Oh, and did I mention that God was in all of this? That is right! God. If we all would just obey the Lord and keep his word, “owe no man nothing” then we wouldn’t be in the situation that were in today.

Wow…

Where do I start?

1. I NEVER said that going long on your mortgage and investing the difference was without risk. I do think that over the life of a 30-year mortgage, the risk is reduced.

2. Although you own your home you still have to pay property taxes. In some areas those taxes are small, but in other areas they can be quite high. Yes, not having a mortgage payment makes paying those taxes easier but you still have taxes to contend with.

3. Your money may not be tied up in “unstable companies” but it is tied up in your house and is quite illiquid. According to Jonathan Clements’ new book, The Little Book of Main Street Money, (review to follow soon) housing prices have increased an average of 4.7% over the last 30 years (through 2008). Inflation has averaged 3.8% per year during that same time period.

Chew on this…

EVEN WITH LAST YEAR’S -37% return for the S&P 500 Index, the index had a compound annual return over the last 30 years of 11%!

To put that in perspective, if you started 30 years ago with $100,000 invested in a house that appreciated 4.7% per year and $100,000 in the S&P 500 Index (minus 1% per year for fees), the house would be worth $396,644 at the end of 2008 and the S&P 500 Index account would be worth $1,744,940. And those numbers include some pretty dismal years for the S&P 500 Index. Even if you paid taxes at 28%, cutting your annual rate of return on the S&P 500 Index to 7.2% over the 30 years, you would have still had over $800,000 at the end of 2008—roughly TWICE what the house was worth.

4. I’m not sure where you’re getting the $500,000 in savings. Not including interest, you’re looking at having to save over $45,000 per year for the next 11 years to meet that goal. Surely I’m missing something here.

5. Lastly, you say:

“Oh, and did I mention that God was in all of this? That is right! God. If we all would just obey the Lord and keep his word, “owe no man nothing” then we wouldn’t be in the situation that were in today.”

If you truly believed that then why did you have a mortgage in the first place?

Seriously though, I think you are referring to Romans 13:8, which reads: “Owe no one anything except to love on another…” The notes in my Bible say that this is not a scripture against borrowing money, which the Bible does regulate and permit (Exodus 22:25; Leviticus 25:35-37; Deuteronomy 15:7-9; Nehemiah 5:7; Psalms 15:5, 37:21, 26; Ezekiel 22:12; Matthew 5:42; Luke 6:34). I think the virtue from the Bible that would have been more beneficial in preventing today’s circumstances would be not to love money (greed). Borrowing is both a tool and is necessary for an economy to function properly. It’s when the borrowing gets out of hand (usually due to greed) that we get into trouble.

Bottom line: you have to do what works for you. If the thought of owning your home is important to you, then by all means, own your home. But, that does not mean that it’s the best or most prudent decision for everyone else.

Thoughts?

Also see: Flawed Thinking (Part 2)

The article seems pretty clear that Mozilo was aware of just how bad things were while he was dumping his company stock. Mozilo had always played the “I-don’t-know-how-this-could-have-happened” card. I remember reading in the Wall Street Journal (I can’t remember which article exactly) Mozilo saying something like, “No one could have seen this coming.”

Sure, pal.

Assuming that these charges hold up and Mozilo is convicted, what do you think should happen to him? What would be considered justice in your opinion?

I think he should be stripped of all his worldly possessions and wealth. If he were younger, I’d make him lay railroad tracks or fill potholes on America’s crumbling highways…lol.