Posted by MataHarley on 19 February, 2009 at 8:42 pm. 36 comments already!

UPDATE 2/20/09: It appears Obama’s White House is mocking CNBC’s Rick Santelli’s criticism of the Obama admin’s housing plan. Apparently:

White House press secretary Robert Gibbs poked fun at Santelli by inviting him to come to the White House to read the details of Obama’s plan. “I’d be happy to buy him a cup of coffee,” Gibbs said. In a nod to Santelli’s caffeinated style, Gibbs then wryly added: “Decaf.”

All I can say to Gibb and Obama is… PICK ME! PICK ME! I’m ready, you idiots….

Back to your usual programming….

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Oh fer heavens sake, are these people brain dead in Washington? And whoever Obama has “outsourced” his so-called-foreclosure-rescue bill to has really proven to ignore realities about our foreclosure problems.

It was back in September that I put together the post on the perfect storm of events that, combined, led to this housing bubble… and it’s ceremonious burst sending shockwaves thru the economy.

Figuring prominently in those events was the astronomical rise in housing prices that started late 1997, and ran thru late 2006 and part 2007. It’s as simple as this… house prices are too danged high. And even with the decline that all in the beltway are moaning about, they are still higher than they would have been traditionally with the normal, conservative appreciation yearly that has always been the hallmark of homeownership.

So what do we have in Obama’s… or whomever he’s playing the dummy/ventroloquist act for… in his Homeowner Affordability and Stability Plan?

Audacity meets absurdity.

First, let’s address the few details we have. WSJ ‘s Evan Newmark had an article on the WSJ blog yesterday, pointing out only some of the idiocies these beltway brain trusts have come up with.

Is there anything more heartless than foreclosing on a home and throwing a family out on the street?

How about taxing the family next door into penury to pay for the reckless borrowing of its neighbors?

Welcome to the Obama Homeowner Affordability and Stability Plan — a complicated wealth redistribution scheme dressed up as a cure for the nation’s housing woes.

It is almost certainly bound to fail.

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Just read the four page White House Executive Summary with its laundry lists of programs, federal and state bureaucracies, conditions and caveats.

It’s confusing stuff even for the average MBA. How will it be digested by the average low-income subprime borrower?

Here’s the loan modification process:

“For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38% of his or her income. Next the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent…”

Again, that’s the Executive Summary.

Can you imagine the chaos of a loan modification meeting between a subprime borrower and a bank officer?

Multiply that a few million times — and that’s the $75 billion “homeowner stability initiative.”

That’s if Obama is lucky enough to find the 3 to 4 million “responsible homeowners” he thinks would qualify or want to qualify for the government moolah.

But he’s almost certainly overestimating the number of “responsible homeowners” out there.

Those 3 to 4 million “responsible homeowners” are actually “credit challenged” borrowers. They put down very little money to purchase homes at very inflated prices.

Not only do they hold no equity in their homes today. Even with a modified loan, there is only a remote prospect of building equity in the future.

Bingo, Evan. Welcome to the mainstay of my argument that, had housing prices not gone thru the roof, and unqualified buyers be given loans, our real estate economy… that is at the very heart of our national economy… would not be sweating bullets.

The point? It’s absurd the way Obama’s planning on rescuing the real estate world with government interference because they are not considering housing prices today… or even five years down line. At best he is staving on the inevitable. Allow me to ‘splain…

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Geithner’s Treasury Department has provided us with a few sample cases to show how this would work.

Family Case A involves a property with less than 20% LTV (loan to value). Meaning that with conventional mortgages, they are hard pressed to want to provide a refinance loan that’s any more than 80% of the declining value on the market today.

Family Case B is an example of a property who’s mortgage matches the current value of the property in today’s market.

Both of these families… with declining value, or less than 20% equity… end up with HIGHER MORTGAGES after the government loan modification. Well, now… that’s curing the problem of an over valued asset, right? …. sigh…. Talk about ignoring a huge piece to the problematic puzzle.

But, I will say, both of those scenarious are entirely possible to end up okay… providing housing doesn’t decline further, and they don’t move for the next five or six years (see later…).

But neither of those families are the ones who are the most likely candidates for Obama’s plan.

Family Case C is indicative of most that are distressed properties… people that are upside down in their mortage to current value. That includes not only people who purchased during the boom, but for those that refi’d their homes, took out equity and (perhaps) spent it on anything *but* home improvements.

For this Family C case study… below, a segment of the Treasury Dept PDF.

family-case-c
click to enlarge

Note: This is far more readable using the link above – located on Pg 2 of the case study example document.

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Here’s the scene… borrowers have a $214,016 mortgage on a home worth $189K today. The “help” Obama proposes is to renegotiate the same loan amount for lower percentage. This is the equivalent of an already-in-practice method for borrowers by buying down in the interest rates via points.

Per the Executive Summary I linked in above (in the blockquote article), Obama’s admin is asking the investment bank to cover to cover the costs of those points to bring the monthly payment down to no more than 38% of the borrowers’ income. He’s advocating the government then absorb the costs of the rest of the points charge to bring it down further to 31% of the borrowers’ income.

Just for your reference, to buy down one permanent (over the life of the loan) point is the cost equivalent of 1% of the mortgage amount. In the case above, that would be (rounded off) $2140 per point.

Buying one point lowers one’s interest rate by about 0.125%. Or to make it simple for you, for the cost of two points, you can lower your interest rate a quarter of a point, or .25%. And the cost of that would be $4280.

In other words, in the real world, paying $4280 to buy down the interest rate in the case above would take that 6.5% interest rate down to 6.25%.

Well dang… we’re a far cry shy of 4.42%, aren’t we?

Needless to say, there’s a lotta money in “points” between the 7.5% interest rate on the current loan, and the 4.42% suggested in the example above. Even based on a current rate of say 5.8%, we’re still miles apart in the cost of points.

Reality dictates, *someone* has to eat these costs…. and this is this only part one of the devil in the details.

This is nothing more than “affirmative action”, but instead of based on race and nationality, this is “economic affirmative action”. If you are a solvent qualified buyer, you pay the full rate for a buy down. If you are not a solvent, qualified buyer you get a discount rate.


I have to ask… why bother to be qualified or solvent? And why bother to have a prime rate at all?

~~~

Obama’s economic brain trusts are not being genuine, nor realistic about the costs of this program and, instead, have just “capped” it. At what, who’ll know after Congress gets ahole (sorry… freudian slip typo…) – I meant gets *a hold* of this thing. But they throw out the number of 3-4 million “at risk” borrowers with a $75 bil initiative. We’ve already seen that even two points buy down… which doesn’t get Family C anywhere close to 4.42%… is about $4280. Take that to 3-4 million people, and we are well over $75 bil.

And how does that loss get split between bank and government/taxpayer? (and that’s assuming it *would* take them to a 31% of income level….) Let’s look a how the Obama economic brain trust figures it…

family-case-c-how-it-works
Click to enlarge

First, the Obama admin says that in order for Family C to meet their lender base of 38%, they need to come down from 7.5% to 6.38%. In the real world, this would cost a borrower over $19,000. And that’s still not low enough.

So Obama’s government… meaning you and I dig *deep* into our pockets… wants to kick in the additional cost for the matching points.

What are they offering the lenders as incentive? $1000….

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.

Uh… am I crazy and misunderstanding this? But what happens to the other $18K bank loss for the first year of this loan modification, while they wait to see if the borrowers stay current for a couple more years?? Multiply this initial loss times 3-4 million loans – despite that “pay for Success” pittance – and we’re STILL talking future bank bailouts.

Stablize, my arse.

~~~

But wait! There’s MORE!

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.

After buying down the points, we… the tax payers… are now paying these borrowers bribe money to make their payments on time.

~~~

I’d like to say we’re done, as this is absurd enough as it is… but we’re not.

Let’s look at the loan balance after all this money spent. They have a $214K loan on a $189K valued home before this taxpayer/banker charity loan modification.

After the modification? The borrowers STILL have a $214K loan on a house only worth $189K.

Okay, I’m a realist. Home properties go up and down in value. Sometimes you’re making money, and sometimes your not. That’s not the problem here. There’s a few more ugly facts in this “cure”.

This little charity loan modification is only a five year grace period. Yup… remember that fine print in the first jpeg above from the Treasury PDF about their specific figures and monthly payments?

It specifically says:

Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.

Wow… and that’s different from an ARM how? Perhaps only that “‘phased in level” is not based on prime rates.

Or is it? They don’t tell us what “phased in level” *is* based on, do they?

But let’s skip that vague detail for a moment, and just look at the current value of $189,000. Let’s assume that as soon as they got this modification, real estate wasn’t still going down in value, but started instantly rebounding, rising at a nominal 3% annual appreciation.

At the end of the five year period, before the government modification “ARM” kicked in, that house would then be worth $219,102. That’s a big $5033 over the mortgage value.

Get serious… this won’t even cover closing costs on a sale in most states except for in a FSBO (for sale by owner) scene. And that’s hoping there are no transfer taxes.

So what if the family needs to sell or move anywhere between 1-6 years? They are still a dang SHORT SALE and the bank takes yet another hit after already taking the hit for the initial mortgage discount points.

Brilliant. Who thunk this crap up anyway? And this is only my first, quick read of this “plan”.

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What we have here is the height of absurdity.

The taxpayers and the banks are on the hook for paying trillions in discount points if they take care of the “3-4 million people” they promise to. The mortgage is still probably overvalued for the asset’s worth, and all these taxpayer gift low mortgages reset – just like an ARM – in five years… so nobody better move!

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Again, I wish I were done, but….

And what of more than 50% failure rate of modifications already done? What’s the “point”, pardon the economic pun…. The banks give up tens of thousands per loan to refinance at lower rates, the taxpayer pays additional points, the upside mortgages are still over value and the five year government “ARM” isn’t long enough to possibly bring it up to even current value…. Only to have them default again?

Someone has got to stop these bozos in charge of the nation’s money… talk about both audacity and absurdity.

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