I was interviewed by a reporter today about the new Stimulus package. $275 billion is allocated, they say, for housing relief. He asked, "Is it enough?"
My response was that it might not be enough but it sure is a good start. And start we need. We've been fooling around with the foreclosure mess for well over a year now. It has been getting worse and worse and the programs that have been tried, notably Project Hope Now and Hope 4 Homeowners, have been miserable failures.
Also the big loan servicers have not seemed to have been successful at keeping borrowers in their homes. They may have trouble with their investors but the results have been disappointing to say the least.
Housing got us started on the path to this mess and my belief is that we aren't going to come out of it until housing gets fixed. And you fix housing by not foreclosing on a million or two loans held by people in financial trouble.
When you read the elements of hte plan that we know so far, and they are not many, there are some good programs that will affect, in my humble opinion, not as many people as they hope. But, as I said, it's a start. Let's start down that path and see what happens.
There are three methods of lowering someone's housing payment. You can extend the loan term, like to 30 years, but that's not much help. You can lower the interest rate to current market, say 5.xx%, and that's a good move. If people cannot afford a mortgage at current low market rates, they ought not stay. The final option is to reduce the principal amount owed. It's not clear about how investors will accept or rate the desirability of these options and it does take some cooperation on their part to make this work.
In addition to this, there is a plan to make incentive payments both to borrowers and loan servicers for each year that the loan modifications are successful. That's helpful too.
What seems to gag some people is the thought that bailing out someone who make poor or even stupid financial decisions is morally wrong. I am pretty libertarian myself but I let the practical side speak at times like this. The worst "offenders," if you want to call them that, got 100% financing with toxic loans that they maybe never can afford. They are going to get the boot if they haven't already. There is simply no way to save them that I can see.
But there are those who maybe bit off more than they could chew or who got trapped by circumstance like job loss or dropping income in our troubled economy. If you can keep them in the house making payments at market rates, I see no possible merit in foreclosing on them and, as they are putting the stuff in a moving van, giving them a lecture about morality.
More details will be forthcoming on March 4th and we'll get a chance to hear from lenders, loan servicers, and investors as to how attractive the program is to them.
Stay tuned.
Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.
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It’s nice to hear “high hopes.” To me, it seems absurd to try and spend ourselves into prosperity, or even relief. Just look at all the third-world country bailouts. Where does the money go? It goes to UP. By “UP” I mean to those who don’t really need it. It seems like the same old game over and over.