Home Loan Focus

The Geithner/Obama plan to ‘help’ home owners called the “Homeowner Affordability and Stability Plan” and the guidelines – Text Version – that spell out how it is to be executed called the “Making Home Affordable” Guidelines have some holes big enough to drop a country (the size of the United States) through.

Problem 1 – Not Big Enough

The program is only designed to cover 7 – 9 million Americans despite the fact that there are between 50 – 80 million Americans holding mortgages.  In 2008 over 2 million people went through foreclosure and 2 million+ more are expected to go through foreclosure in 2009 by the most modest estimates.  8.3 million people currently owe more on their homes than those homes are worth, which means they can not sell their homes and relocate if they lose a job or even get a promotion requiring a move.  Furthermore, if home prices drop just another 5% (and rates have been going down that much every month in 40% of states in the US (not just California as the problem is spreading) then 2.2 million additional borrowers will be underwater.  Plus, almost 2 million people left the United States and moved to Central America last year as jobs evaporated, which also helped to fuel the evaporation of new home buyers capable of buying a home.

This drop in home prices works like an avalanche.  As it drops more, it picks up more snow and increases in speed consuming more and more formerly safe, stable and financially secure Americans that are in its path.  There are only about 40-50 million American homes that are owned free and clear with no mortgage.  But even these are at the risk of lower prices, increasing property taxes, and rising incidences of property crime as suburbia is turns into gang infest ghost towns.

Problem 2 – Wrong Focus

Then there is the issue that after paying $2 trillion to bail out Wall Street this plan only offers up $75 – %80 billion to actual home owners.

$2 trillion if divided amongst 75 million mortgage holders could have provided $26,000 to each home owner to revalue those mortgages, write down principle, and lower mortgage payments or even payoff mortgages all together!  This could have enabled people to tighten their finances, fix their budgets, and if they need to move, sell or buy a home, they could have done it.  And that is 75 MILLION households, not 7 million that just happen to be covered by 2 failed institutions (Fannie and Freddie).

Instead the government has put good money after bad in a never ending hole for capital currently nick named the financial markets.  They complain about the hocus pocus of hedge funds while poring more money into the banks that own, run and invest in hedge funds instead of the people that own real assets (homes).

Problem 3 – Too Little Too Late – Incentive to Foreclose or go Bankrupt

Essentially the government is simply creating an incentive for homeowners to go through foreclosure or bankruptcy.  The real estate market is not in the tank it is going down and down into the tank.  We are NOT at the bottom yet.  Throwing money on the fire does not stifle the flames, it causes it to burn more.

More and more homeowners that are underwater are realizing that their only real option is to sell their home to the highest bidder, their bank holding the mortgage. 

When that isn’t enough the other option is to walk away from their debt all together in bankruptcy.  Through a bankruptcy consumers can dismiss tens of thousands of dollars in debt on their unsecured credit cards, renegotiate their mortgage rates, their mortgage principal, their car loans and more.  Even if they go through Chapter 13 – Reorganization, they stand a better chance of renegotiating their credit card interest rates down to single digits at a time when credit card companies are racing to raise rates up to 30% before new laws go into effect in July 2009.

Plus, the credit card companies are eliminating credit limits for card holders left and right.  They are dropping credit lines, canceling cards and more.  For those people that worked very hard to keep their credit up and pay their credit cards on time, they are seeing their credit rating sabotaged by banks cutting their limits for no reasons that have to do with that consumer.  They might as well already be in bankruptcy!  Their credit rating goes in the tank, their interest rate goes up to 30%, their cards are canceled, Chapter 13 starts to look like a blessing because all the perils of bankruptcy have already been experienced by people that pay their bills on time!

Problem 4 – Government Reinvention of Sub Prime Loans

So after subprime loans supposedly got us into this mess, the government plan relies heavily on sub prime tools to get people ‘out of this problem’.

• ARMs
• 40 Year Loans

Those ‘evil’ adjustable rate mortgages(ARMs) that trapped millions of people are essentially exactly what the government is offering.  They are enabling people to finance at interest rates of 2-4% for 1-4 years to make their homes ‘more affordable’.

Hello! That is exactly what mortgage brokers did with sub prime loans.  They even went one step better offering 0% mortgages. 

The government is essentially prolonging the problem.  This does enable people to live and fight another day from one perspective.  It also enslaves them to their homes, to the banks and now to the government (with a loan that might not be able to be forgiven in bankruptcy) from another perspective.  Would you rather be enslaved to your home, the bank and the government, or rather sell your home back in a foreclosure or escape the bondages of your debt in a bankruptcy and be on the path to healing your finances (with your full income that you have now).

The second thing that the government is offering is a 40 year mortgage.  There is a historical reason why 40 year mortgages have not been offered to the masses.

40 Year Mortgages are a rip off and they do not make homes more affordable. 

A 40 year mortgage will force a person to pay far more on a mortgage than a 30 year mortgage.  The interest like a credit card where a person pays a minimum payment, almost never stops.  After the first 10 years, you might as well have rented your home, because you will not have much more principle built up in your home.  The banks will earn significantly more interest from you during that time.  In fact you will pay for your home multiple times over in interest even though you will still owe the principle!

This isn’t change we can believe in this is just a really bad idea.  That pretty much sums up all of the plans offered so far in fact.

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