Three Things Wrong with Obama's Housing Recovery Plan

1. Fannie Mae and Freddie Mac loans: Homeowners who have loans with Fannie Mae or Freddie Mac are allowed to modify their loans provided  the remaining balance on the mortgage does not exceed more than  5% of the current  “Market Value”. I think  many homeowners  will not be able to modify their loans under this program because home values are declining at a faster rate than the cap rate of 5%.

2. Voluntary Lender Program : The plan wants to give ” $1,000.00 cash”  incentives to lenders who modify loans. A lender must be willing to reduce the current mortgage to 31% of the homeowners gross income.  For example, a person who makes $50,000 per year  has a monthly gross income of $4,1,66.67 .  According to this plan, 31 % of the monthly gross should be a persons mortgage. In this example the mortgage payment should not exceed $1,291.67 per month. The maximum mortgage a person would qualify for based on this scenario is $241,616.31 (based on 5% Interest, 30 year Amortization) .It is unclear if this monthly amount includes Principal, Interest, Taxes, Insurance. If taxes and Insurance are not factored in then the maximum mortgage would be less. Now let’s assume this same person has an existing mortgage balance of $300,000 and has a subprime rate of 7% . The monthly payment on this loan is $1,984.33 . The difference in payment between $1,984.33-$1,291.67= $692.66 per month or $8, 311.92 loss in 1 year to the lender. The new plan will only reimburse the lender $1,000.00 so the net loss to the lender in 1 year is now $7,311.92 . Does this sound like a good plan for the lender? I do not think so, and therefore I do not see this volunteer program working very well.

3. Plan calls to change the Bankruptcy Code: The third part of the plan will allow a judge in bankruptcy court to help modify the loans with lenders. The bankrutcy judge would be allowed to force the lender to lower the principal balance owed on the debt in order to make the monthly mortgage payments more affordable for the homeowner. I think the courts will overburdened with people attempting to modify their loans and this plan will not be successful.

While Obama tries to help homeowners from loosing their homes to foreclosures he admits many will not be helped with his plan. Those not being helped are people who are unemployed, those who have second homes, or those people who took advantage of the system to begin with and according to Obama will not be bailed out.