Friday, March 6, 2009

Another mistake

There are things in the mortgage bill that are clearly indefensible.
Many of the mortgages involved were made with a very small or no down payment. Because of this even a small downturn would have put them underwater. So what? Everyone house is worth less than it was 2 years ago. This plan rewards the people who did not save for a down payment and does nothing for the people who saved and bought within their means. Further, the current value of the house has nothing to do with the mortgage payment. The people living in the house either continue to live there or pay rent someplace else; the current value no bearing on anything. Also, the plan does not include any mention of what happens when the value of the house appreciates. Does the borrower get to refinance and take more cash out? It puts the government (taxpayers) in the position of supporting bad investments and punishing good ones.

Many of the mortgages were refinances. The property owner mortgaged the equity, increased their payments and received (cash) in return for a larger monthly payment. The plan includes these mortgages but there is no attempt to determine where the cash went or if there is any left.

The plan provides these “qualified” borrowers $1,000 a year for 5 years for making payments on time. Because the overwhelming majority of people bought homes they could afford and saved for a down payment to keep the payments with the proper range, their payments are on time. The plan rewards the people who got themselves into difficulty is because the payment. Again, the wrong behavior is given incentives.

The plan proposed that people whose payments exceed 55% of their pre-tax monthly income get counseling. Again, bad behavior is rewarded. If the payment is 55% of pretax income, that means, even with a low tax rate of 20%, almost 70% of the borrower’s income was going to a mortgage payment. That is the point at which government thinks the borrower help. So people are in houses they had no chance of paying for (or even eating regularly) and the government supports their wanton behavior. Again, people who live within their means get to pay for it.

The next assault on sanity is to give Bankruptcy court judges the power to unilaterally alter the mortgage terms. This incredible proposal means that a judge can lower the amount owed and the interest rate to whatever fits the borrower capability – voiding the lending contract. That means the bank loses money – and who pays for that - and future contracts are no longer secure. The point is to encourage lending. But this would accomplish the opposite. Lending takes place because the lender believes that the borrower will honor the terms of the loan. This creates a situation where a third party can void an otherwise valid loan contract. That certainly does not encourage a lender to lend any money to any one. Further, since the risk is increased, the interest rate will go up. Another foolish proposal that is consistent with the absurdity of the entire Making Homes Affordable program.

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