Obama’s Foreclosure Rescue Plan
President Obama’s senior adviser David Axelrod was apparently on “Fox New Sunday” saying that his housing plan is “solid.” It’s unclear whether this plan will lead to permanent loan modifications, or if it’s a stopgap measure.
The plan is supposed to provide immediate help to homeowners are “right on the edge of foreclosure” and help in “raising home values that have been plummeting.”
Like most others, I am not privy to the details of said plan. However, I repeatedly hear people saying that “housing is the crux of the problem.”
My response is that housing is a REFLECTION of the underlying problems in our economy. Previously, subprime loans and adjustable-rate mortgages caused what I call the “first wave” of the foreclosure crisis.
Currently, falling real wages and rising unemployment are contributing more to this “second wave” of the foreclosure problem.
During the first wave, the calls were predominantly from homeowners who simply couldn’t afford their re-set payment, and could not refinance into a lower cost mortgage. Typically, this was a result of the tightening mortage market and/or the fact that they hadn’t really improved their credit score during the term of their teaser rates.
. Over the last 6-8 months, I am increasingly hearing from homeowners who have experienced an extreme decline in income. More and more, this is becoming “the story” for homeowners in default.
I’ve said on a number of occasions that the mortgage industry has consistently been 18-24 months behind the curve in responding to changing conditions.
The federal government’s solution du jour is “streamlined modifications,” championed by FDIC Chair Sheila Bair. I recently spoke to a former IndyMac employee who still keeps in touch with his old colleagues. I asked him, “How’s the recidivism rate on those streamlined mods?”
“Not good,” he said.
“Worse than the fall-through rate on traditional mods?”
“Yes,” he replied emphatically .
He asked me what my opinion is, and I told him that I expect a failure rate of 75-80% on streamlined mods.
Many people don’t even qualify. They don’t just automatically lower your payment to 38%. If that 38% is not substantial enough to justify lowering the payment, the investor is going to foreclose. So you can’t expect to to qualify for a streamline loan modification if you’ve had your income cut in half.
And even if they do allow you to keep the home on those terms, 38% is about HALF of your take-home pay, in most cases.
There’s been hints that they may lower the front-end ratio to 31%. Regardless, the first point on this topic still stands.
I’m shocked, and a little dismayed, at just how many homeowners really believe that the federal government is going to bail them out. Every measure thus far has fallen flat. The TARP program is a disaster. The loan modification approach is a bust. Many knowledgeable people believe this stimulus bill is a joke. We’ll see on Wednesday whether Obama’s foreclosure rescue plan follows suit.
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Tags: foreclosure rescue, Obama