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Thursday, March 5, 2009
According to this Reuters article, One in 8 U.S. homeowners late paying or in foreclosure, 1 out of 8 US homeowners is behind on their mortgage, or already in foreclosure. This is absolutely stunning. According to the article even prime loans are experiencing higher foreclosure rates caused by job losses and overbuilding. The author of the article did not seem optimistic that Obama's foreclosure plan would work. I agree. This will certainly lead to more short sales and foreclosures and result in hurting the housing market even more. Since Tennessee has a higher than average number of foreclosures I expect the TN housing market to be hurt more than average over the next several years.
According to the article U.S. Sets Big Incentives to Head Off Foreclosures on the New York Times website the Obama Administration unveiled two new plans that will help many in people in foreclosure.
In my opinion neither plan will not solve the foreclosure problem. The problems with the plans are as follows:
- Investors are excluded. Since many foreclosures, particularly in Florida, Nevada, Arizona and California were from investors (actually speculators) those foreclosures will continue.
- Second homes and vacation homes are excluded. Since many people not only purchased too much home for their budget, but also too many properties (i.e. second homes and vacation homes) they got into financial trouble. Since the plans do not cover these owners the foreclosures will continue.
- Many people who are in foreclosure are there as a result of not being financially responsible. I have personally seen people with combined incomes of almost $100,000 not be able to pay mortgages payments of $2,000 to $2,400 per month (includes principal, interest, taxes and insurance). The Obama plans allow for mortgage payments to be as low as 31% of a person's income via paying matching funds to the lenders. The numbers I show above are less than 31% yet those people still did not pay. The reality is that the housing payment is only one part of the problem. Typically, these people had a lot of other debt and just spent recklessly.
- Both plans require that the home owners have enough income to pay the modified payment. This is meaningless if the people have lost their job due to health issues or the current economy. For a while now health issues which cause a person to lose their job have been a big factor in foreclosures. Since the plans require that people have a job people in this position will not be helped by the plans.
- Plan 1 (Refinancing for Strong Borrowers) limits the total new loan to a maximum of 105% of the home's current market value. Since many people now owe far more than their home is worth even if they are current on their mortgage payments they will not see any help from Plan 1. The result will be that these homeowners will eventually slip into foreclosure as the market value of their home declines.
- Plan 2 (Loan Modifications for At-Risk Borrowers) does not place a limit on the loan amount with respect to the market value of the home, but it limits the reduced modified payments to a term of 5 years. After 5 years the interest rate will probably reset to today's market rates. The problem is that for may people they still will not be able to pay the market rate in 5 years. Also, this Plan fails to address the issue of what happens when the people cannot pay the modified mortgage and the loan amount is still greater than the market value. In short, this plan is betting that the market values will substantially improve in 5 years.
- Neither plan addresses the core reasons of why we are in this mess to begin with. The core reasons are: (1) Homes and real estate just got too expensive as a result abnormal demand caused by what I call "housing euphoria" which resulted from an increase in the homeownership rate that was enabled by loose credit standards. (2) People started buying homes that they could barely afford even with a 2 income family so there was no room for any job loss. (3) People purchased homes with risky adjustable rate mortgages in order to allow them to buy more home in the short run without regard for any rainly days or "what if's". (4) People just borrowed and spent too much in general.