Streamlined Modification Plan, socialism expands in the United States
Posted by Mike Sylvester - 11/11/08 @ 8:55 pm - Filed Under Uncategorized
Well the Federal Government has finally unveiled a plan to subsidize homeowners who willingly and purposefully entered into mortgage agreements that they could not afford.
This plan is socialism at its worst. It rewards people who entered into mortgage loan agreements they could not afford and penalizes the rest of us. This program will be paid for by future taxpayers and so penalizes everyone for the actions of a few.
This program is from the Department of the Treasury, Freddie Mac, and Fannie Mae. It will apply to all loans held by these organizations and some other lenders. Since the taxpayers now own Fannie and Freddie the losses this program generate will be directly paid for by current and future taxpayers of this country. The program works as follows:
This plan starts on December 15th, 2008. It applies to at-risk borrowers who are 90 days or more late on their mortgage payments, are not in bankruptcy (Can be in foreclosure), and applies to owner occupied single family homes. In order to qualify for the program the current loan to value amount must be 90% or higher. This means you must not have more then 10% equity in your house in order to qualify. The program will apply to people with loans held by Fannie Mae, Freddie Mac, and other lenders who join the program.
Once you apply for the program they will adjust your monthly mortgage payment (Including capitalized past due payments - meaning they will take all of your past due payments and make you pay them back over time, principal, interest, property taxes, insurance, and HOA/condo fees) to be a maximum of 38% of your monthly gross income. They will do this by any or all of the following: Extending the length of the loan, lowering the interest rate, or by writing down the principle.
If this plan does not work they emphasize there are other options available.
All late fees are waived and you will be forced to escrow property taxes etc. if you were not already doing so.
In order to have your loan modified you will have to be current with the new loan as of day 90, in other words you will need to make the first three payments at the new lower amount.
This plan is complete garbage and is outright socialism. It forces all taxpayers to directly subsidize people who bought more house then they can afford. This plan directly rewards irresponsible behavior.
This plan is also wrong because it will not be a magical cure for the housing crisis. This plan MAY keep a few hundred thousand people in their homes for a longer period of time and it MAY cause a couple of hundred thousand people to be able to keep their homes. This will in no way cause the housing market to rapidly increase.
This plan was just released and it will end up being several hundred pages long or even longer.
It will be interesting to see how this plan deals with 2nd, 3rd, or 4th mortgages on homes for credit card debt, car debt, etc.
Let me give you some examples of how this socialist plan will work. Note I have read the summary and the initial information they released today, I expect the plan to change between now and December 15th, 2008.
My first example is for a family of four that makes $64,564 per year in gross income (before income taxes). Lets call this family Mike and Kathy Smith. Note that $64,564 is the median gross income in the US in 2008. This mythical family of four makes on average $5380 per month prior to income taxes (Of which they will pay VERY little).
Lets say they purchased a house on September 1st, 2008 for $200,000 (About the current median home price). Lets say they have a fixed interest rate of 9% since they have bad credit and made no down payment. Lets say they rolled their closing costs into the loan (which is very common now). This would cause them to have a loan for about $205,000. Lets say it is a 30 year loan. Lets say they pay property taxes of $3600 per year and home owners insurance of $600 per year and they are escrowed.
This leaves the Smith family with a monthly mortgage payment of $2000 per month.
In case you think my example is far fetched please realize that my wife and I bought our home in Fort Wayne in 1999 for $206,500. I paid $3500 in property taxes this year and I pay $600 a year for homeowners insurance. In 2003 my wife and I had a family of four for the first time and made $64,010 that year. This example is basically my family except I am assuming a different purchase date and I am assuming the purchasers of the house have bad credit which gives them a higher interest rate then I would have and they did not make the 20% down payment that we made. So this example is very normal for Fort Wayne and the country in general.
So the Smith family of four is paying $2000 per month for their home mortgage (And I have assumed no second mortgage even though the VAST majority of people behind on their mortgage payments have multiple mortgages). Their monthly gross income is $5380 per month. This means that their monthly mortgage payment is 37.3% of their gross income per month. So our example family already is below the 38% ratio and would not qualify for the program unless they have missed so many payments that the capitalized cost of those would increase them to above 38%. So the Smith family does not qualify; basically, they were not irresponsible enough to qualify.
Lets say that the Smith’s best friends are the Jones family. They are a family of four with the exact same features as the Smith family except they purchase a much larger house; after all, buying a large house is the American dream for many people. They decide to buy a $300,000 house. The owners of this house will pay about 50% more in property taxes and home owners insurance so the Jones family will have a monthly payment of $2975 per month. This payment is 55.3% of their monthly gross income so the Jones family may qualify for the new taxpayer funded wealth re-distribution to stupid people plan otherwise known as the Streamlined Modification Plan (SMP).
Lets say the Jones family elected to buy a new $35,000 SUV on September 1st as well. This caused them to not have enough money to pay their mortgage once you consider their new big screen TV, the six different Verizon fios boxes in their house, their $200 per month cell phone plans, etc. So the Jones family heard about this new bailout that was coming and decided not to make any payments on their house. So they miss their first three mortgage payments and become 90 days delinquent. Now they apply for this program and guess what. The government may write down their loan to almost exactly match the Smith’s loan (Maximum of 38%, so the new loan will be a lot like the Smith’s loan mentioned above)
In other words the Jones will have a $300,000 house and make the payments as if they had a $200,000 house. Because they were irresponsible the Jones will be rewarded with a $300,000 house they only have to pay $200,000 for.
Isn’t America great?
Lets say the Jones loan was held by Fannie Mae. Fannie Mae must write down their loan asset by $100,000. This of course means the Federal Government will have to issue more Treasury notes and hope China buys them so that The Federal Government can reimburse Fannie Mae for this loss. This means the taxpayers will have to pay this back plus interest.
Tomorrow as the details of this plan are studied we will know more; but, lets do some simple math. Lets assume that Fannie and Freddie elect to write mortgages down rather then lower the interest rates or extend the terms of the loans to just keep the math simple here. (Note if they lower the interest rates it will have the same effect on their bottom line; however, their losses will be spread over future time periods)
Lets further assume that 250,000 Americans are saved by this plan and they all make prompt payments on their houses for the next 30 years and change their financial habits due to this gift from the government. Lets say they have smaller houses then the Jones and that on average their mortgages are written down an average of $50,000 each. If this was the case this plan would cost the taxpayers 12.5 trillion dollars.
I am certain that as the plan is studied the Congressional Budget Office and other scholars they will be able to put a much more accurate price tag on it; however, it is likely to be extremely expensive; though less expensive then my simple calculation above.
This bill is also going to anger a majority of Americans if it is left in its current form.
Now the Government has listed three options that they can use to lower your monthly payment and each of these three options needs to be discussed.
The first option is to extendthe terms of the loan. This is the only option that is acceptable in any way. In they lengthen the loan by several years this will lower the monthly loan payments; of course it could leader to 40 or 50 year mortgages throughout America as well. This option I can live with.
The second option is to lower the interest rate. When they lower the interest rate they will have to write down their asset since the asset will pay at a lower future interest rate. They will also make less in interest income over the course of the loan. This option is not a good option; however, it is far better then the third and last option.
The third option is to just write down the principal amount of the loan. This would result in large losses for Fannie and Freddie immediately and would require hundreds of billions or trillions of dollars of infusions in the next couple of years.
Does ANYONE reading this post think this plan is fair or a good idea?
Mike Sylvester
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9 Responses to “Streamlined Modification Plan, socialism expands in the United States”
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I look for like minds that think each individual
has a future. There are always choices.
Oh Hell No! This is not fair!
We are in a revolution, if one can not afford a home mortgage then rent one.
I and all Americans will not buy your home or pay for your risk.
Can you say, get your college education, go get a job, pay your bills, and rise to the cream of the crop. Spend time paying your dues first. It takes time.
How incredible it is to be an individiual. Who can take that away? No one can…knowledge is yours for ever.
A portion of America thinks:
Get a free college education on pell grants,
apply for government housing, government health
care and rise to be the cream of the crop.
Will that individual state of mind bring about a rate of return to America?
I understand the frustration at people having mortgages that they cannot afford, but is the best solution really to just keep foreclosing on homes?
This plan seems relatively acceptable. People get to stay in their homes at the higher cost of extending the length of their mortgages.
If anyone has a better solution to fixing the problem now, rather than restating again, and again, and again, and again how we ended up in this mess I would love to hear it.
In this situation lenders should do what Citibank is doing - they are voluntarily renegotiating their loans with those people that are going to be foreclosed on. This makes perfect sense for Citibank because it’s better to get something rather than nothing. However, the govt should not mail Citibank a check to cover their losses in this situation.
The problem is Fannie Mae and Freddie Mac only exist because of tax payer money so they can’t eat their losses without us covering it.
But let me just ask - what’s so bad about the people described in this plan being foreclosed on? Obviously they have a job and money so they could go rent or buy a home they can afford.
This entire plan is about propping up unsustainable real estate prices. If more and more people get foreclosed on then prices will drop back to a market level that makes sense.
But if you’re a homeowner in California you don’t want that to happen because right now, on paper, you have a tremendous amount of equity in your home. So it’s better to have the govt bailout the people because that keeps your net worth artificially inflated.
What this bailout does is take the losses from homeowners in inflated real estate markets and spread it out over all taxpayers. Unfortunately the market is going to correct itself anyway and we’re just going to end up holding the bag on this bailout with nothing to show for it.
Jeff,
I don’t think government wants to have the values of houses go down to where they should be as long as property taxes are based on the value of the home. I agree that the prices of homes in certain areas of the country have spiraled out of control over the last several years.
Mike,
I think in your example of the Jones’ house they would only have a $300,000 house if they could find someone willing to pay that amount. Since it would be easy to find out what their mortgage was issued for, as a buyer I would never offer them anywhere close to $300,000 knowing that they only had a $200,000 rewritten mortgage on that property.
In response to Justin on November 12th, 2008 12:03 am ….
specifically: “If anyone has a better solution to fixing the problem now,”
Well, as luck would have it, I have a solution. Let them ALL be foreclosed on. We will never reach a true economic market “bottom” or “baseline” if the government keeps subsidizing. Hell, I’m in the real estate business and I don’t relish the thought of my business slowing down any more than it has, but I’m smart enough to realize there is a bigger picture here, and it’s in our fiscal best interest to let the market correct itself.
The same with GM & Ford & Chrysler. There is an economic mechanism in place (one of the most liberal in the world) called bankruptcy. It’s there for a reason, and allows the debtor to restructure & stay open for business, or “flush” all of the debt and re-open as a new LLC called “The New GM” or “Icahn Investment Motors” etc. . There is absolutely NO REASON to give them a dime.
Not only is all this an absolutely awful recipe for economic socialism, it also contributes to the all to prevalent mind set of “Why worry, they’ll bail my ass out too”….
It’s setting a terrible example……and it’s totally unnecessary other than to keep politicians busy and acting as if they are doing something for “us”.
It’s BULLSHIT.
My American dream is to not have to pay rent or mortgage someday. I refuse to pay more than $90K for a house.
Robert, I also assume part of your American Dream is to NOT have to pay for your neighbors house as well….
Tim Zank - Ditto!!!!!! John B. Kalb
[...] I posted about some of the programs that our politicians in Washington DC have implemented to help people stay in homes that they cannot afford in a post 17 months ago. [...]