Mean Street: Why Obama’s Homeowner Rescue Is Bound to Fail
Posted by Deal Journal
Is there anything more heartless than foreclosing on a home and throwing a family out on the street?
How about taxing the family next door into penury to pay for the reckless borrowing of its neighbors?
Welcome to the Obama Homeowner Affordability and Stability Plan — a complicated wealth redistribution scheme dressed up as a cure for the nation’s housing woes.
It is almost certainly bound to fail.
Now, there is no doubting that Obama’s heart is in the right place. With foreclosures at record highs, the American white picket fence dream is crumbling.
And the impulse of any caring President must be to do something, almost anything to keep the dream alive.
But the experience of politicians tinkering with the U.S. housing market is not a happy one. Fannie Mae and Freddie Mac, anyone?
Real estate is simply too complex to be manipulated by anything but the “invisible hand” of the market.
Disagree?
Just read the four page White House Executive Summary with its laundry lists of programs, federal and state bureaucracies, conditions and caveats.
It’s confusing stuff even for the average MBA. How will it be digested by the average low-income subprime borrower?
Here’s the loan modification process:
“For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38% of his or her income. Next the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent…”
Again, that’s the Executive Summary.
Can you imagine the chaos of a loan modification meeting between a subprime borrower and a bank officer?
Multiply that a few million times — and that’s the $75 billion “homeowner stability initiative.”
That’s if Obama is lucky enough to find the 3 to 4 million “responsible homeowners” he thinks would qualify or want to qualify for the government moolah.
But he’s almost certainly overestimating the number of “responsible homeowners” out there.
Those 3 to 4 million “responsible homeowners” are actually “credit challenged” borrowers. They put down very little money to purchase homes at very inflated prices.
Not only do they hold no equity in their homes today. Even with a modified loan, there is only a remote prospect of building equity in the future.
For most, economic self-interest says to walk away from the house rather than carry a modified mortgage that will suck up 31% of monthly income.
Truth is, many of the “credit challenged” borrowers won’t even get to running the numbers. They simply will have no interest in sitting down with a bank officer and going through pay stubs and tax returns.
Income verification? Are you kidding? That’s why many took the subprime mortgage in the first place.
That millions of homeowners were and are “irresponsible” is a harsh truth that Obama can’t really talk about.
In his America, the Obama housing plan is one neighbor helping another who is simply down on his luck. If only his America were real. Then maybe his program would actually work.
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Another scheme that wont work.
