This is a policy comment, something I hate doing.
The administration recently announced the Homeowner Affordability and Stability Plan. It spends $75 billion to help 4~5 million homeowners for mortgage modification, so that they can keep homes from foreclosure. It attacks the heart of the problem, and it’s a good deed. Anna?
However, I’d like to direct your attention on some of the specifics of the plan:
- Refi for homeowners up to 105% of property value at lower rate, $1,000 per year for on time payment for 5 years
- $1,000 per modification for servicers
- $1,500 per modification for mortgage holders (banks)
The list doesn’t cover all aspects. But let’s look at these from the perspectives of the homeowners, servicers and banks respectively.
Homeowners
There are several types of homeowners in terms of foreclosure. I had a previous post raising the questions and nobody cares answering. Let me reiterate the point considering a homeowner facing the plan.
If you lose your primary income (job), you may not be able to afford it before/after the refi anyway. Taking the refi is a painful decision: grit your teeth while draining your saving account till it turns, w/o knowing when.
If you are a high-income earner bought a house recently, OMG, what a windfall, thanks to the recession. Bizarre, urh?
If you are a speculator that invested in a secondary house, walking away is still the wise choice.
What the plan will really save are the borrowers doped into the absurd 2/28, 3/27 mortgages, which shall not exist except as a tool of predation (or speculation. Yeah, so complicated). The plan will reduce the to-be-reset, higher rate, and allow refi homes down 20% in value.
Servicers
$1,000 per modification? I don’t see how doing a mod requires much more efforts than installing cable.
I guess why it is what it is is that servicers always choose foreclosure, the low cost option for a servicer.
Banks
Refi, reducing income of the mortgage holders (by slowing down the payments? I need some accounting help) notwithstanding, fares better than foreclosure.
If that is the case, the $1,500 per mod is a snuck-in help to the banks ($6 bn in total assuming 4 million mod, a piecemeal for the problem).
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