Several days ago I blogged that the next thing on the Obama Administrations plate was to deal with the foreclosure situation. I was extremely concerned that 'free money' was going to be given away to attempt to stem foreclosures - from people who had no intentions of paying back their mortgages even if they were adjusted.
As someone who works extensively with Foreclosures and Bank Owned properties, I see a high percentage of these homes that have gone under NEVER had a payment made on them. Zero down loans and you didn't need a job or to show your income was a recipe for disaster. To 'bailout' many of these would be no different than what is going on with General Motors.....we kick a can down the road....but we still have to continue to throw good money after bad.
My thoughts were this: Provide a financing incentive for first time home buyers by providing 2% loans that begin adjusting in five years by 1% per year until they reach the market level or a predetermined cap (6% for example). By doing this, you are filling starter homes with people who are underwritten and capable of making their payments.
I just can't support a bailout for the 80% or so that received 'Liar's Loans' and did not make a payment while getting 1.5 to 2 years of housing 'rent free'.
So, what do we do about the 20%? I think the Obama Administration has come up with a halfway decent plan. Here it is:
Borrowers who have kept current on their mortgages are eligible. Because of falling home prices, many of these buyers are upside down and unable to do a refi because they cannot qualify due to equity concerns of the banks. Homeowners who have upside down equity of up to 5% can qualify for lower rates (those that are 5% or more upside down cannot).
Homeowners in default, or at risk of default on their loans can qualify for modifications. If one qualifies (when total debt including cars, credit cards, etc.) are looked at you can have your payments reduced to 31% of your current income. (Mainly interest rate reductions, but also some principal reductions could take place). In addition, make payments on time for five years and there will be a $1,000 bonus per year.
There is more to the plan to be introduced on March 4th. But, it appears that the approach is well thought out and does not reward those that have proven to not be a good risk for holding a mortgage.
While the Obama Administration has stumbled in their first few weeks, this one looks like they may hit a bullseye with a well thought out program. I am still a believer that they should offer the 2% to qualifying first time home buyers as part of the deal. The faster starter homes are filled with responsible mortgage payers, the faster that the market will recover at all levels of the food chain.