The Mortgage Bailout Reward Program

By now you are probably well aware of the massive spending stimulus bill that was just signed into law.   You also may have heard that the President also has a plan to help homeowners that cannot afford to pay their mortgage.  Known as The Homeowner Affordability and Stability Plan, the White House says that it contains 4 key goals:

1. Refinancing help for four to five million homeowners who receive their mortgages through Fannie Mae or Freddie Mac
2. New incentives for lenders to modify the terms of sub-prime loans at risk of default and foreclosure
3. Steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages
4. Additional reforms designed to help families stay in their homes

This plan has sparked outrage from responsible citizens who see this massive mortgage entitlement plan as unfair to homeowners who pay their bills on time, and who live within their means.  What is really outrageous about this plan however, is the rewards and incentives which are built into the program.  Yes, not only is the government (read: taxpayer) subsidizing the lower interest rates and principal reductions which will be given to borrowers under the program in order to mortgage payments more affordable, but also extra incentives such as:

 "Pay for Success" Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive "pay for success" fees - awarded monthly as long as the borrower stays current on the loan - of up to $1,000 each year for three years.   

Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

 

Yes, you are reading that correctly.  The government will now pay lenders $1,000 up-front to modify a loan, despite the fact that the government is also subisidizing the interest rate and principal reductions.   This is supposed to be an incentive for lenders to participate in the program, but isn't the fact that the government is now subsidizing any losses the lenders would be taking by modifying the loans incentive enough?  The lender also gets a $1000 a year bonus for up to three years if the borrower remains current on the loan because... Um, I really don't know what the rationale for this is other than the fact that the government likes spending OPM (Other People's Money).

But that's not all.  The borrower also gets an incentive to stay current on the mortgage, in the form of a $1000 per year principal reduction on the mortgage for the next five years.  Excuse me, but what happened to the old days when the incentive to stay current on the mortgage was that you get to keep your house?  Are we actually paying people not to be deadbeats?  What's next?  Free gas for life as long as you make your car payments on time?  Free groceries as long as you promise to feed your hungry children?  At some point aren't we crossing the line between helping to fix the economy and just being plain old stupid?

Written by Michelle Chamberlain and originally posted at www.mortgage411center.com.

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