Today the government announced what they hope will be the "standard" for loan modifications in the U.S. The "standard" they set out has formerly given them entrance into my Hall of Idiots (shared by Robert Kiyosaki and Jim Cramer).
With big fanfare, on Veterans day a host of governMental (emphasis on Mental) entities lead by the FHFA announced a plan that will fail. How do I know? Its been tried and is already failing, plus, it doesn't actually solve any problems. What is going on here is that the lenders are trying to get out of these loans with as little pain as possible while portraying themselves as the white knight saviors of our society.
What we have are lenders who made lots of bad loans and now they don't want to share in the losses that these loans will inevitably bring (and already have). You have lenders who made loans to people who had less than $20,000 in income, yet were able to take on a $600,000 mortgage - but they think they shouldn't feel any pain.
Todays announcement amounts to playing "kick the can".
Here is what they want to do:
First, you must be three months behind in your payments.
Second, they will try to work with you to lower your payment by temporarily lowering the interest rate or increasing the term of the loan (to 40 years).
Escrows for real estate taxes and insurance must already be set up.
38% is the threshold debt level.
Must sign an affidavit that you are in a hardship.
The whole program is going to force people who can make payments or are struggling to make payments in order to protect their credit stop making payments and decimate their credit. Anyone who participates will see their FICO score plummet. I know that FICO scores aren't public, but should someone be punished for potentially the next five years in order to get in line for a program that may NOT even help them? This is just stupid.
Temporarily lowering the interest rates to 1 or 2% and or increasing the loan term to 40 years (which doesn't lower the mortgage by much but increases interest by a ton) sounds very similar to the crazy, ridiculous loans that were offered that got us into this situation in the first place. It doesn't solve the problem, it kicks it to the future a few years. What happens when the rate adjusts back to the original rate? This isn't a fix.
Why in the heck would you require that someone already have escrowed real estate and insurance? This makes no sense and I'm hoping its being misreported. Think about it - exclude someone because they chose to pay their taxes and insurance on their own........yeah, real smart. They could simply require that taxes and insurance are escrowed as part of any loan modification.
The last thing is what is really stupid - a signed affidavit of hardship. Listen to the circular logic here:
The economy is in a free fall because of housing. Housing is in a free fall because of foreclosures. Foreclosures are accelerating because housing is in a free fall and people owe a lot more than their home is worth. In order to stop foreclosures and help the economy we've got to help homeowners.......errgo..........lets only help those who will sign an affidavit of hardship.....what?
How about this - owning a home worth half what you paid for it is a hardship - think that is acceptable, they will tell you no.
So if you can make your payment, but are disgusted by the mortgage industry that gave tons of people loans that they never should have been given, which artificially drove up the price of the home you bought in good faith (and could afford) you are not eligible for help. Forget the fact that you could walk away and the lender would be stuck with a huge loss. Forget the fact that these people are more than willing to negotiate, but will walk if ignored and forget the fact that they are the best hope for the lenders long term.
It seems the brightest people in the room are really just a bunch of emperors with no clothes.
When you make a bad loan you should pay the price - that way you don't do it again. The lenders don't seem willing to admit that they are responsible for this mess and its high time they take that responsibility, share some of the loss and start cleaning things up. This "standard" that FHFA put forth is the typical of government standards - Mediocre.
The lenders don't want to face the music and the government is trying to prevent them from facing the music because of capitalization issues.
Today's announcement will be soon forgotten as the government quickly finds its a stupid solution that will put more people even closer to foreclosure. Three months from now they'll put forth another stupid solution, then maybe a year from now they'll actually do what is needed........of course they could just listen to Sheila Bair now.
Scott Dauenhauer CFP, MSFP, AIF