The plan announced today is based on a fairy tale - the same fairy tale that the Bush administration and congress hoped would have a "happily ever after" ending. That ending would be a world where foreclosures stop and home prices climb back up allowing the banks not to have to write down trillions in bad mortgage loans. This is what everybody in Washington is hoping for, but it just won't happen - it isn't possible.
This latest plan fails on five fronts:
1. It aims to help those who can least afford to stay in the home
2. It helps people who have reasonable interest rates already and have only lost a little on their home
3. It doesn't help out anyone for whom helping would make financial sense
4. There is not enough money being used
5. There is no provision for real write down of principal
If this Bloomberg article doesn't prove me right, I don't know what will, the key paragraphs:
More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.
The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.
U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth. About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors.
This program is a failure and housing is getting worse, again. Bank of America's announcement yesterday was a joke, an absolute joke.
Without meaningful principal writedowns and the wiping out of worthless second mortgages we will continue to see mass foreclosures, defaults and short sales.
Scott Dauenhauer CPF, MSFP, AIF