Bush has rolled out a plan to supposedly help adjustable rate mortgage holders who face foreclosure. It is an option to refinance into an FHASecure loan. Seriously, let's be real about this. Who and how many people is this really going to help?
FHASecure program will require 3% equity in order to refinance. The homeowner may refinance delinquent payments but the loan refinance amount can not exceed more than 97% of the appraised value. How many of these people have 3% equity in their home? None? Okay maybe a few, but certainly not many by comparison to the volume of loans at risk.
Most homeowners purchased their home with 100% financing and others have cashed out on their equity for debt consolidation, college education for the kids or home renovation. Now add to the equation devaluation if the home is in an area where sales prices have declined. The proposed changes will help some and I am very happy for those that can benefit. But this is only a drop in the bucket and folks, it is pouring!
And what is the problem? The average homeowner began their adjustable interest rate loan (ARMs) already stretched thin and many over extended their budget means. In addition, they have been getting squeezed by rising gasoline costs, utilities, insurance and everything else with not enough income increases to accommodate these costs. Now add to their eroded budget continual and substantial mortgage increases, of course, they are in trouble! They were in trouble before the loan payment increases took effect.
But, it is not just happening to the adjustable rate borrowers. Many fixed interest rate borrowers are also in trouble for the same rising economic reasons and over extended credit with no equity in their home to allow them to sell in order to avoid foreclosure.
I don’t like to go out on a limb ranting and raving without offering a solution. I do think that Bush was right at the White House press conference today when he said, “The government has got a role to play…but it is limited”. Indeed, this FHA plan is all of that! It is limited! The role that needs to be played is not the government’s role, but lies with Bernanke.
Bernanke could put a stop to this cycle. If mortgage interest rates dropped significantly for a limited time, 1) everyone could refinance out of their ARMs or higher fixed rate loans to prevent being a future foreclosure, and 2) the saturation in housing inventory could get some relief with a burst of new buyers. From there we could move forward with stricter ARM guidelines (ie…borrowers must qualify at highest potential rate of the loan) and the normal real estate environment could sustain a higher interest rate from there forward.