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Rant and Rave

Due to a huge volume of applications, and the fact that we are still waiting an official disposition with all the details as to how the HASP and ARRA will help all the different homeowner’s across America, I thought I would share an article from Holden Lewis of Bankrate.com written on 2/23/2009:

Rant heard round the US – Holden Lewis

 

FACT AND FICTION: During his political rant last week week about the president’s foreclosure prevention plan, CNBC reporter Rick Santelli turned to his buddies on the floor of the Chicago Board of Trade, and said, “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.”

 

Believe it or not, no one raised a hand. Now, keep in mind that Santelli’s friends on the floor of the Chicago Board of Trade are derivatives traders. You’ve heard of derivatives — the people who traded them helped to get us into this economic mess. Unlike you and me, derivatives traders don’t make or fix anything, or teach, or put out fires or do anything productive, as far as I can tell. Borrowing Richard Nixon’s phrase, Santelli calls derivatives traders “a pretty good statistical cross-section of America, the silent majority.”

 

Derivatives traders, the silent majority! In Nixon’s day, the silent majority was guys wearing hard hats and swinging hammers. In Santelli’s day, the silent majority is guys wearing funny jackets and monitoring the bid-ask for federal funds futures.

 

In response to Santelli’s rhetorical question, a trader piped up: “How ’bout we all stop paying our mortgage? It’s a moral hazard.”

 

I doubt the trader could define “moral hazard,” but whatever. Under the plan announced last week by President Barack Obama, people who have not missed a mortgage payment will move to the front of the line, ahead of people who have fallen behind on their mortgages. Under the plan, loan servicers and mortgage holders will get more money for modifying at-risk borrowers before they fall behind than they will get for modifying the loans of borrowers who already have fallen behind.

 

The plan delivers a clear message: It will be easier to get help if you stay current on the mortgage.

 

Joe Kernen, CNBC’s anchor in New Jersey, interrupted Santelli’s philippic to say that there are borrowers who could get their rates reduced to 2 percent, and they still wouldn’t be able to afford the mortgage payments. “So why are they in the house?” Kernen said. “Why are we trying to keep them in the house?”

 

The plan doesn’t try to keep people in unaffordable houses.

 

I have a colleague who complains that the federal government is trying to let people who earn $40,000 per year stay in their $400,000 houses. But I just don’t think that’s the case. Let’s run some numbers.

 

Let’s assume someone with a $40,000 income owes $400,000 on a house. The borrower got an option ARM and made the minimum payments for three years, and now the loan is going to recast at a higher rate, making the payments grossly unaffordable.

 

Under the Obama plan, the lender would be asked to reduce the interest rate “so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income.”

 

Let’s assume that covers only principal and interest. For someone making $40,000 per year, the 38 percent threshold gets mortgage payments down to $1,267 a month.

 

If you drop that borrower’s rate to 2 percent — unrealistically low — the monthly payments would be $1,599 for the next 27 years. Stretch it out to 30 years and you get a payment of $1,478. How about 40 years? Then you’re down to $1,211. That gets you under the 38 percent threshold. At that point, the lender and the federal government would each kick in $89 per a month to get the payment down to $1,033 a month, or 31 percent of income.

 

I gotta tell you, I don’t think that’s a realistic scenario. I don’t expect them to reduce people’s rates down to 2 percent and extend the terms to 40 years. I doubt lenders will go as low as 3 percent. (In the above hypothetical, a 3 percent rate wouldn’t work.) Maybe some lenders will go as low as 4 percent, and others might bottom out at 4.5 or 5 percent.

 

Under Obama’s housing plan, borrowers would get those low rates for five years, and then the rates would “step up” over a few years, to the market rates at the time they were modified. In the above scenario, the monthly payment would exceed $2,000 five years later, assuming a 5.5 percent rate and a $395,000 loan balance.

 

Nah. If you owe $40,000 on a $400,000 house, the Obama plan is going to stand aside and let you go into foreclosure. Kernen asks, “Why are we trying to keep them in the house?” The plan doesn’t try to keep everyone in their houses. Some of them. But not the egregious cases.

 

THE 8 PERCENT SOLUTION: Later, Santelli granted an interview with National Review Online, and he said something that spread all over the Internet over the weekend, and it needs a correction. Santelli said, “The issue is, you can’t pick out 8 or 9 percent and give them things that weaken the 90 or 92 percent who are carrying the water.”

 

Since then, a lot of people have been writing about how 92 percent of the people are paying their mortgages on time. Wrong.

 

In my opinion, the most reliable report on mortgage delinquencies comes from the Mortgage Bankers Association. The latest numbers they have come from the third quarter of last year. At the end of September, 2.97 percent of mortgaged homes were in foreclosure. On top of that, 6.99 percent of mortgage borrowers were at least 30 days late but were not in foreclosure.

 

Five months ago, 10 percent of borrowers were late or were in foreclosure. No one doubts that the number is higher now.

 

OTHER SOLUTIONS: Santelli and I agree on something: Obama’s foreclosure plan is flawed. I will point out a solution or two in upcoming blog posts and articles. I especially want to go into detail about this post by the blogger Calculated Risk. His suggestion is simple, and can be embraced by people on the left and on the right. More on his idea later.

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