UPDATE: See this post for details released on March 4, 2009 regarding this plan.
The mainstream media, the blogiverse and the average Joe on the Street are all abuzz today with the “Mortgage Rescue”, “Homeowner Affordability and Stability Plan", “Homeowner Bailout” ”“ pick your title.
Announced yesterday right here in our backyard of Mesa, Arizona, the President delivered his $75 billion (and counting) plan to stave off foreclosures.
I’ve made it pretty clear here in many past articles that I’m not a fan of big government and/or government intervention in a free market. Color me a conservative ”“ it’s not a crime. But, and I say this with much trepidation, now may be time for the government to do something.
Things I like that Obama said:
But I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.
Speculators (who made up a large chunk of the Phoenix housing market boom) shouldn’t be bailed out. All investments carry risk. These investors knew that (or should have known that) going in. For those “investors” that jumped on the housing market boom without doing their research, oh well. The responsible homeowner and taxpayer shouldn’t have to pay for your ignorance and failure to complete your due diligence.
I’ve seen too many people using their homes like ATM machines. Anyone who thinks home values only increase hasn’t done the 3 minutes of research required to dispel that fallacy. These people need to reap what they have sown. Sorry if that sounds callous.
. . . we will create new incentives so that lenders work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure.
While it’s unfortunate that lenders need to be incentivized to do what needs to be done, the simple fact is they do. Most of this plan will be voluntary on the part of lenders. Perhaps the planned incentives will motivate some to play that otherwise wouldn’t have.
Things I don’t like that Obama said:
My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value ”“ as long as borrowers pay their debts under a court-ordered plan.
Judges are people too, but they are not mortgage or financial experts. To give them the power of reducing principal balances ”“ if unchecked and without proper education/training ”“ is asking for trouble. How many will take the radical step of filing for bankruptcy just to get their principal balance reduced? As Jeff Corbet so eloquently pointed out in his great piece on “MObamanomics”, this provision may motivate lenders to pursue loan modifications. But I’m not sure that justifies a radical step like this.
Through its existing authority Treasury will provide up to $200 billion in capital to ensure that Fannie Mae and Freddie Mac can continue to stabilize markets and hold mortgage rates down.
It’s not holding mortgage rates down that I don’t like. Lower rates (if people can take advantage of them) are generally a good thing. It’s the slinging around of staggering amounts of money that concerns me. $75,000,000,000 here, $200,000,000,000 there, $787,000,000,000 for what some are calling only “Phase 1” of the stimulus package. Hell, I’m wearing out the “0” key. We’re throwing trillions of dollars at these problems like it’s nothing. That frightens me. I’m not fond of the idea of every future descendant of the Thompson clan having to pay for our mistakes.
What I wish Obama had said:
Elimination of pre-payment penalties: I rarely hear this being discussed. Right now there are tens (hundreds?) of thousands of people (typically with sub-prime loans) basically locked into a current mortgage because they can’t refinance due to (often ridiculous) pre-payment penalties. Many times reducing a mortgage payment by only a couple of hundred of dollars a month would help someone on the edge keep from defaulting on their mortgage. “Waiving” pre-payment penalties might allow some to refinance, thereby saving their home from foreclosure.
Call me crazy, call me a heretic, call me whatever. What’s about to follow will likely piss some people off. Oh well.
Falling home prices are not all bad: What I see very few people mentioning is that there are some good things about declining home prices. OK, I am a homeowner. Of course I’d love to see my home’s value increase every single day. This isn’t a realistic expectation, but I’d still love it. The simple fact is, declining home values mean homes become more affordable. Better affordability means more people can buy a home. It’s basic economics folks ”“ Demand curves and the Law of Supply and Demand and such. This market will reach equilibrium, with or without government assistance. That equilibrium point may lie lower on the price axis then people would prefer, but the government mucking about isn’t going to change fundamental laws of economics.
On reduction of principal balance
This is a tricky one. Many are saying that unless existing mortgage balances are written down to existing market values, nothing will help. My problem with this is two-fold. Primarily, I simply don’t know how this could possibly be managed. There aren’t enough appraisers on the planet to determine “market value” of every existing home ”“ or even just for homes where the owner wants their principal reduced (which would be basically anyone that bought, or did a cashout refi, on a home in the past 2 or 3 years).
What about the prudent home buyer that saved for a down payment, didn’t use the ATM feature of the boom, and is not currently underwater? They get to slog along as they are now, while the neighbor that refinanced and got cash for the new car and a trip to Disney World gets his principal balanced reduced. In other words, some of get to finance others transgressions. That should go over well.
And when does the writing down of balances stop? Do we just write down mortgage balances carte blanche when prices continue to decline? In 2012 (or whenever) when there is another downturn in home prices, do we engage in another wholesale write down? Home values are cyclical, always have been, always will be. Setting a precedent that the government will step in with a wholesale write down when prices decline could be a recipe for future disaster.
Will this mortgage rescue plan work?
I don’t know, but I have my doubts. Many of the details are to be released on March 4. Until then, we can only speculate and assume ”“ neither of which are particularly good things to do.
Most disturbing seems to be one of the guidelines that will help people who are underwater on their mortgages limits refinances to 105% of current market value. Prices in Phoenix have dropped 30 ”“ 50% depending on where you look and whose statistics you believe. 5% wouldn’t seem to touch it.
Clearly this isn’t a cure all. Obama even made that point. A step in the right direction? Maybe. Opening a big giant can of crap that may take a generation to undo? Maybe.
I’m not smart enough to know all the answers. A large part of me says that we suffer through it, painful as that will be, and let the market correct itself. I happen to think it will. Guys with Nobel Prizes in Economics think so too. I suppose a nudge in the right direction could speed things up and/or lower the pain threshold. But we need to be very careful. I’m not sure we are thinking all the ramifications through as Congress passes trillion dollar bills the no one has read and we start doinking with fundamental economic laws and principals.
I’d love to hear your thoughts. . .
Others Opine:
Morgan Brown at Blown Mortgage
Tom Royce at The Real Estate Bloggers
The White House Blog (yes, that White House)
Jeff Corbet, The X Broker on AR
Michelle Malkin
Chris Butterworth at The Phoenix Agents
Spencer Rascoff (Zillow COO) on Active Rain
Greg Swann on Bloodhound Blog
Have a good link? Drop it in a comment and I’ll add it to the list.
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Jay–
Very well written piece today on the housing plan. I actually wrote a similar piece for filife.com which is a member of the Wall St. Journal Digital Network. One thing that I have been thinking about this morning is that yes–they are allowing refinances for underwater borrowers–but will these new loans require mortgage insurance? I can tell you that the biggest barrier to buying and refinancing these days is not the fannie/freddie guidelines, but rather the MI guidelines. Just this week we have seen minimum credit scores for FHA/VA and USDA loans rise to 600. Some lenders are going up to 620 and one is 640. I think there is some chance that these initiatives will work–at least no one can say that if we go down, we didn't go down swinging.
**Steve Heideman´s last blog post..Comment on What’s Ahead For Mortgage Rates after the Stimulus Plan? by Steve Heideman</abbr></abbr>
The issue of foreclosure help is certainly a conflicting one and if there is a right answer to it, I'm not sure the government or any other entities would be capable of implementing it properly. On the one hand, you've got speculators and HGTV-ers that might benefit from this regardless of what the intentions of the President might be. On the other hand, there's responsible homeowners and predatory lending victims that find themselves under water. And everything in between. How do you precisely determine what the actual story (or intention) was behind the homeowners' original purchase? On the other hand, it's easy for some folks to swear by "the market will correct itself in due time" from their 5th Avenue (paid-for) apartment.
I don't know what the answers are. But I guess it helps to voice our concerns out lout.
**Erion Shehaj´s last blog post..master-bedroom.jpg</abbr></abbr>
Hi Jay,
I posted my thoughts on ActiveRain: http://activerain.com/blogsview/941624/My-thought…
I don't agree with any of the stimulus plan. Free market principles always work out in the long run, even if the short term there's trouble. When has big government and more spending made anything better?
I will be holding thumbs that it works.
You made some excellent points here. I agree about pre-payment penalties. I wish they would do away with those altogether.
Regarding home values, everyone compares current home prices to the inflated prices at the peak of the buying frenzy. Of course, they're lower. That bubble has burst. But are they lower than they were in 2004 or 2003? Are they what you would've projected they would be today sans bubble? I don't hear anyone discussing that, but I think it's a more reasonable indicator.
A real estate agent saying foreclosures are OK. Yeah, probably because you sell foreclosed homes. You and your type are what caused this mess in the first place. Why don't YOU do something to fix it? Like quite charging people 6%, quite paying off appraisers, and quite selling people homes they cant afford.
"Anonymous"
I didn't say "foreclosures are OK". I said, "there are some good things about declining home prices". Foreclosures suck. They are hard on a family, and they are hard on a neighborhood. But there ARE some good things about lower house prices. Just ask the first time home buyer that can now afford a home.
For the record (not that it matters) we don't list foreclosures. We have helped folks buy them. With as many as there are in the Phoenix market, they are rather hard to avoid.
Also: 1) you have no idea what I charge; 2) I've never paid off anyone; and 3) I've turned down clients that wanted to buy more home than they could afford.
And I think the word you are looking for is "quit", not "quite". As in, "Quit commenting anonymously, it makes you look quite foolish."
Jay, you raised a good point about the pre-paymant penalty issue. It may be moot since values have declined so much.
As far as Mr. Anon, i second you. If a person is afraid to sign his/her opinions they are worth nothing.
I still hope to see incentives for buyers to absorb the excessive foreclosure inventory.
I also would like to see builders quit building for a while. If they don't they will only drive themselves into bankruptcy.
I also just posted my analysis of this plan on activerain. http://activerain.com/blogsview/942524/The-Presid…
Wow Jay, you really broke it down. There is so much to swallow here it is a bit hard to digest, but I believe that I agree with you. Clearly typing the number 787,000,000,000 is mind blowing. I am curious, but not excited to see how that eventually gets paid back. I just can't see it being paid back within my lifetime (I'm 30 now).
Regarding the 105% LTV, that is really tough. I know one person right now that bought a house for $420k during the market peak and now the homes on either side are in foreclosure for $275k. You may be saying, what what that guy thinking but it wasn't his fault. Our wonderful city decided to eliminate their urban growth plan and his property, which was within the path of progress just become a little home outside of the city limits. If he can't make his payments, there is no way he would receive any relief in this case.
At any rate, I am sure that we can all think of some case examples where there are going to be people that deserve a break, but just won't fit the mold.
**Ryan´s last blog post..Bellingham Washington Foreclosure List</abbr></abbr>
I agree with the argument that declining home prices are a good thing. I have said this many times before. When the prices for homes here were taking off, all we were contributing to was an overall decline in our standard of living. Everything just got more expensive.
Now, that the reverse is occurring the long term implications are that housing here in the Valley will again be affordable and attractive. Yes, there will be pain to be felt by all. But at least there is a silver lining to this.
Regarding the comment against Realtors, here's my philosophical comment. If you think that the behavior exhibited through the run-up was just about Realtors charging high fees and mortgage brokers takiong advantage of people, you would ignore the behavioral aspects of Americans in general in the way they cashed out the value of their homes for the benefit of toys and luxuries. This was a behavior that manifested itself in the worst way in this industry.
The bigger challenge is going to shift Americans' thought processes from 'I don't want to feel the pain at any cost' to 'You have to feel the pain to appreciate what you have' and that pain is a normal aspect of life. Think of the term 'soft landing.' Why is it Americans have become so afraid of the 'hard landing' or a 'challenge.' I don't imagine that was the attitude forty years ago.
**Chandler Real Estate´s last blog post..Buying a Home – Tips and Steps</abbr></abbr>
Jay:
Good post – I think you make clear there are some good aspects of Obama's plan and maybe some not so good. I also have my doubts about the plan – but I think we can all agree that we hope it will have a postive impact on the RE market and hopefully our economy. You do hit on the issue of fairness. Bottom line, no loan modification plan can be fair to all parties. People whi put their own cash into the property are maybe less likely to receive help than those that put no cash into a property. In the end, I think the market will be mor effective in solving the problem. Let the lenders foreclosure, sell at a loss (and you are right they should bear the loss not the US taxpayer), and let new buyers come in and establish a new lower fair market value from which the market can solidify and start to move upward again.
**Arn Cenedella´s last blog post..Obama plan part 4</abbr></abbr>
I agree that home prices dropping isn't a bad thing. Everything getting more expensive with wages not keeping up isn't good for anyone. Lots of buyers here were priced out of the market and thought they would never be able to afford their piece of the American dream. Jay you make an excellent point about pre-payment penalties. It was overlooked in the bill and should have been addressed, along with some of the other fees that are tacked on to a mortgage. One thing is for certain, it took years to get to this point and it will take some time to get back out of it.
**Charles´s last blog post..First Time Home Buyer Tax Credit</abbr></abbr>
Jay,
Thanks for taking the lead on this and adding some transparency one objectivity.
I have, for many years helped Buyers and Sellers in and around Denver realize the American dream of homeownership. Although I focus more in the luxury niche I have frequently helped first time buyers, move-ups, basically every kind of buyer out there. During the course of my experiences I try to infuse my clients with the fundamentals of sound decision-making related to both valuation and financing of real estate. During the boom years it was common for attractive homes in inferior locations to still get a lot of activity and still command high prices even relative to superior locations– competing on cosmetics instead of true value. Worse were the scenarios when that same home was bought with a teaser rate COFI 3/1 ARM with negative equity guaranteed regardless of value. I'm proud to say, I'm sure along with you, that I have convinced many clients not to fall into that trap– and yes; I've lost clients for my firm position on these points.
That said, the problem is here. Regardless of how, who or why, the markets have come apart and we're feeling the pain in Evergreen, Colorado!
I am against the bail out and believe that with true market dynamics the problem would eventually settle itself out. Even with no regulation lenders would continue to fail if the offered poorly structured, guaranteed to fail mortgages. Yes some would still fall for the teaser temptation but ultimately bad lenders, brokers, agents and even Buyers are doomed to fail in a free market. Maybe not fast enough for some. I suppose as all of this money that well be borrowing from our kids, our kid's kids and China will teach us a lesson. I just hope the lesson isn't a fundamental change in what has made America so strong for so long.
Sent from my iPhone.
**Bob Maiocco´s last blog post..Denver Luxury Homes in the Mountains of Golden</abbr></abbr>
Nice breakdown, this entire nation has become the rewarding of bad behavior nation. Right now I own numerous houses and stay awake at night trying to figure out How I am going to make the payments. No bailout for me. But if I let everything go I can get forgivness with short sales, loan modification etc. Banks have no idea how to correct this meltdown or spend the money they will receive. They need people like us in the industry. These are the same people that turn down a short sale offer only to let the property go through the system, go to foreclosure and sell for less than they turned down from the short sale offer. You want to bail out that kind of behavior? Sellers can stay in the property after the sale and the bank will cut you a check to get out. Don't make a payment for 6 months and get a check. Great concept, where do I sign up? The rewarding of bad behavior is alive and well. I talk about these things on my radio show every week. Some people get upset. It's people like us that pay for it. We pay the highest percentage in taxes, have no matching IRA, no paid health insurance and ask nothing from nobody. Can't get unemployment if we don't sell. Help those that did not tap out the equity with modifications. With the remainder I subscribe to Darwinism Economics. DON'T REWARD BAD BEHAVIOR and if you made bad loans so be it, no bailout ONLY THE STRONG SURVIVE. Keep building a better America Jay. May our paths cross in the future.
Thanks Jay for sharing your authentic and genuine perspective on the local (Phoenix) housing market and the relation to Obama's speech. While I'm not a homeowner (god, who wants to be right now?), I respect your balanced insight on the matter.
I am in favor of your suggestion that pre-payment penalties should be waived. This would address the argument that I hear from affluent folks who want to know "where their bailout is?" It would be the incentive needed to help reduce the debt load for people who have paid their mortgage and maintained their equity.
P.S. – I love the sweet blog (re)design! Keep it up!
~Joseph
Great write up Jay. Even though I don't like my home value going down I'm not overly concerned because I don't plan on leaving for several years and by that time the market will have corrected itself. If not then we probably have larger financial problems to worry about.
Plus ,like you said, it is great for first time home buyers.
I like that they are finally trying to do something to help those who are responsible and make their payments on time each month. Before, it seemed that you had to be on the brink of foreclosure, before anyone was willing to help. I agree. It is not the cure, but it is a step in the right direction.
I have thought about retiring to Phoenix for sometime – however when home prices sky rocketed (almost 50% one year) Phoenix was taken off my short list of cities. Now with the drop in prices – back to what I can afford – and many other potential home buyers – I'm planning to relocate to Phoenix very soon. I feel sorry for those who bought at the peak – but the drop in prices is a god send for those looking to live in Phoenix and buy a home at an affordable price.
The government, trying artifically prop up home prices will only delay the eventually price correction – let the free market system work and quit wasting tax dollars, indebting future generations.
I don't think the plan is enough. Frankly, the plan does little to solve the tidal wave of defaults when the 5 year mark hits for those with arm mortgages purchased in 2004-2006. This defaults will enter the economy and the current defaults will pale in comparison to what's to come.
What about the credit card debt. I wonder how credit card defaults will effect things. Perhaps we shouldn't' go there right now.
Colleen 🙂
**Colleen´s last blog post..West Richland Homes For Sale</abbr></abbr>
Jay: You provide good focus to the various sides of the issue here. There was a lot of bad behavior by a lot of people that created this mess.
I can't help but think that the "no money down" home buyer, "flipper", and "re-finance as ATM" person should not be rewarded for their risky behavior.
On the other hand, it seems the whole country got caught up in a "credit bubble" mania that makes the infamous Tulip Mania of Holland seem small by comparison.
Jay,
There are many straight-forward real estate investors who are in it for the long-term and behave responsibly. And then there are the quick-buck artists, or speculators, who have nothing but flipping on their minds and they deserve no help from anybody. I agree with you. They did similar damage here in Las Vegas as they did down there in Phoenix. Now we all are paying for it dearly.
787,000,000,000 . That is a hard debt to type out. I certainly hope this does end up working out for the better; if not our children's grandchildren's grandchildren will still be trying to pay it back..
this is a good sharing. thank you very much
**john´s last blog post.. <a href="http://www.fiacardservices.com</abbr></abbr>” target=”_blank”>www.fiacardservices.com</abbr></abbr>
Am after a loan but am very sceptical these days, there are a lot of sharks out there, can you point me to an article that explains all the different types of loans please? Thank you 😀
The way I see it, these homeowners were duped into burrowing too much by the greedy lenders and now their homes ar not worth anything. In order to keep this situation from getting worse this has to be done. Extraordinary times call for extraordinary measures.
I'm worried that so many people's credit rating will be hurt during this recession that it will prohibit banks from lending money. But their credit gets hurt by the same credit cards the banks deal out. These short-term gains always have long-term repercussions. The government can loan money out all they want, but if consumers can't borrow then its the credit system that needs to be overhauled.
**Title Loans Las Vegas – car title loans´s last blog post..Car title loans Las Vegas Success stories</abbr></abbr>
great post.. you do a great blog. i like it. i will follow your blog.thanks …
great post.. you do a great blog. i like it. i will follow your blog.thanks …
your blog is great , nice sharing and nice themes