Remember this clip?
Looks like that is closer to becoming a reality:
“This housing crisis struck right at the heart of what it means to be middle class in America: our homes,” Obama said in the text of remarks he’s delivering in the Washington suburb of Falls Church, Virginia. “We need to do everything in our power to repair the damage and make responsible families whole.”
The president said his plan would make it easier for homeowners to refinance their mortgages into current low interest rates, which are now below 4 percent. Borrowers, even those who owe more than their homes are worth, would be able to refinance into government-guaranteed Federal Housing Administration Loans.
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The announcement adds to a mosaic of existing programs aimed at boosting the housing market, which is entering its fourth year of weak sales and high foreclosures.
The FHA refinancing idea, if it wins funding from Congress, would help borrowers cut “through the red tape” and limit paperwork. Appraisals and tax returns would not be required, according to the White House fact sheet.
“A lender need only confirm that the borrower is employed,” according to the document. Unemployed borrowers might qualify for the loans if they meet other credit requirements.
Nope, no reason to think there might be any fraud or problems here. It's so easy! No red tape! No documentation needed! Just sign here, it doesn't cost a thing!
The proposal could save borrowers an average of $3,000 a year, according to the document. The program is open to “responsible” homeowners current on their payments and with no more than one delinquency in the previous six months.
Loan applicants must have a credit score of 580 or higher to be eligible and occupy the property they want to finance.
Loans must not exceed FHA lending limits, which range from $271,050 to $729,750, depending on the location of the purchase property. Borrowers who are underwater, or owe more than their home is worth, would be eligible to apply for the loans if they met other requirements.
I can't imagine any opportunity for unscrupulous folks to visit the homes of poor people, charge them a "nominal fee" to "help" them do the paperwork, and then go on to their next victim.
I bet you are asking "Ok, WAMK, since you are so smart, what would YOU suggest?".
I'm glad you asked.
I'd modify the interest rate, but keep your payment the same. The money saved would be put into an escrow account that cannot be touched by the homeowner for a set time period (say five years). The homeowner would be able to borrow against that amount for specific uses (to pay bills in case of a layoff, health emergency, etc).
Say you have a total mortgage payment of $1500 right now. With lower interest rates, your payment drops to $1200 (the Administration has said that the average homeowner would save around $350 per month with a modified mortgage). The homeowner continues to pay $1500, and the $300 per month goes into an account (invested in bonds and T-bills, no NYSE) that gains interest.
After one month, the homeowner has a $300 "savings account". After a year, it's $3600 (plus any accrued compounding interest). Just like your 401(k) with your employer, you are able to borrow against a certain percentage of your "savings" balance, if needed.
At the end of the year, you have the option to designate all (or a portion) of your "savings" to the principal balance of your mortgage.
The problem with the Obama "solution" is that it doesn't protect the Taxpayer enough. If a person is scraping by because their mortgage is too high, and they get a $300 monthly reduction, where is that "new found" money going to go? To pay down personal debt? Nope. New iPhone. New car. New clothes.
Sure, it would stimulate the economy in the short run, but very quickly we would find that people are once again unable to pay their now-reduced mortgage, because they now have higher insurance to pay on their new car, have to pay for gas to fill up that gas tank, have a monthly bill for that new iPhone, etc.
In other words, it doesn't change the behavior of those that got into trouble in the first place. Which means the cycle will repeat (as it always does) sometime down the road, and we'll be in trouble again.
The WAMKMortgage Adjustment Plan works because the homeowner still gets the benefits of the lower interest rate, but the actual funds are kept out of their hands in the immediate short term. You could even make it like a 401(k), and have the funds fully vest over a five-year period. You could even make it a shorter time period, like five quarters, and get the benefit of a short-term stimulus, and a long-term savings plan.
The WAMK Plan also protects the Taxpayers that are paying for this whole thing. Under the Obama Plan, cash is immediately available, with no repercussions. The WAMK Plan allows the reserves to build up over a short time frame, and then with the "vesting" option, allow those funds to enter the Market down the road. People will piss away $300 in a month without thinking twice. Having a lump sum of $900 after three months makes most people think twice before blowing an amount like that in a quick manner.
Want proof?
Look at the "cash cards" people got after Katrina. There were stories of people using the full amount (around $2,000, if memory serves) on bar tabs at the strip club, new rims for the car, purses, etc.
Am I naive enough to thing there wouldn't be fraud under the WAMK Plan? Of course not. But by creating a system in where the homeowner gets some relief, but there is a "middle man" before they can get that cash, it limits it dramatically.
The Obama Plan is no different than handing out Katrina FEMA cards.
And for those of you out there that don't have a mortgage? Thanks for taking care of a portion of mine. I'm sure that will play well with voters.
