Help for under-water homeowners
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Today , the Obama Administration is kicking off a $14 billion program to help consumers whose homes are “under water.”
In Colorado, an estimated 7,000 to 21,000 homeowners could have not only their mortgage rates lowered, but the principal amount of their mortgages reduced under the program, InsideRealEstateNews calculates. Nationally, 500,000 to 1.5 million homeowners current on their loans could be helped under the program. A home is considered under water when the house is worth less than the loan amount.
This is the first initiative targeting homeowners who are current on their mortgages, but have no equity in their homes. Basically, the program, which banks could choose to participate in, would take the loans off their books, after they write down the principal by at least 10 percent, and pass the risk of the default to the federal government. The loans would not only be lower, but would be refinanced into FHA-insured loans, allowing qualified buyers to take advantage of record-low rates. Borrowers would not only need to be current on their mortgage payments on their owner-occupied home, but would need to have a FICO credit score of at least 500.
Second mortgages reduced
The program also would require that second liens against homes be written down so that the total mortgage debt is less than 115 percent of the home’s current value. The government, under the program, would make partial payments to banks to help write down the loans. Second mortgages have been a huge obstacle is refinancing mortgages in the past, as the second-lien holder often has been reluctant to play ball and modify its loans, as it had little to gain.
The new “short refinance” program is being launched at time when the Home Affordable Modification, or HAMP, is not coming close to helping three million people, as originally hopes. Since HAMP began, Colorado has consistently accounted for 1.4 percent of the total – 9,453 in either the active trial or permanent modification portion of it in July. If that ratio holds true for the new program, it could conceivably help just under 21,000 people in Colorado, if the 1.5 million homeowner goal is met. Increasingly, homeowners who find themselves under water on their loans, are debating whether to do a “strategic default,” in which they unload their home through a foreclosure or a short sale, rather than paying on a home that could be purchased today at a much lower price.
Experts divided on its merits
Colorado experts are divided on its merits.
“Well, I think for the short-term it will have some positive impact,” said Byron Koste, executive director emeritus for the University of Colorado Real Estate Center. “Long-term, it is not my favorite thing. It is just an artificial balancing act, rather than a natural balancing act. Some good people are currently hurting and it will help them. And I do not like that the banks will be getting a break. There are consequences for making bad loans, and so this is really another way of bailing them out. But the economy is struggling, and the Obama administration is trying to find a way to get the economy to feel better and this is one of the things they’ve come up with.”
Mike Rinner, of the Genesis Group, which tracks housing along the Front Range, said that wile the “housing market certainly could use all the help it can get, in principle, I think it is a bad idea.” The government is setting aside up to $14 billion from the Troubled Asset Relief Program, or TARP, for the latest program. But it is time to rein in spending, Rinner said. He said the government needs to show fiscal constraint, as throwing money at problems does not solve them. “The government needs to learn that it must spend less tax-payer money, not more of it,” he said.
“I don’t even think this is going to help,” Rinner said. “It’s not going to give the housing market a boost. What is going to give the housing market a boost is some sound economic policies coming out of Washington, D.C. What this is another Band-Aid on a gusher.”
Homeowners gain
But Jeff Bernard, a long-time Realtor who now is primarily a real estate and business consultant, said this program sounds like the best one yet.
“This program sounds very logical to me,” said Bernard, principal of Bernard Real Estate Analytics and a WSI Internet Marketing Consultant. “What I like about this program is that it seems that it will directly benefit the homeowner. What I didn’t like about the earlier TARP bail-out of the banks, is that it did not help the homeowner, but the money just flowed to the bank’s bottom line. Banks can opt-in or opt-out out of this latest program, but it seems they may have more of an incentive to participate this time. And it seems the closest thing yet for something that will be user-friendly to homeowners, so to speak.”
Gwen Jasper, a broker with 8Z Real Estate, one of the sponsors of InsideRealEstateNews, also said that the program sounds as if it has merit, and she would like to learn more about it.
“I think the Denver market is quite narrowly being impacted by the downturn, compared to coastal areas, where homes have fallen by half,” Jasper said. “If we had some kind of program to keep people in their homes, instead of more foreclosures, I think the housing market and the economy would come out ahead. This program definitely sounds like it would kind of help to motivate people to stick around in their homes, until they gradually see some increase in value – but not the craziness we saw when the market previously to levels that were just unrealistic and unsustainable.”
Key: Cut the red-tape
Still, she hopes the latest program does not become bogged down in a bureaucracy.
“Honestly, I am not completely aware of all of the guidelines that come into this latest loan modification program,” Jasper said. “But with previous programs, some of the biggest problems were there were so many hoops to go through that people just kind of gave up on the banks, and the banks kind of gave up, because they were so over-whelmed. This sounds like a step in the right direction. I just hope that is is not bogged down in red-tape.”
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John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.!
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This is the program that should have gone into effect from the beginning – rather than rewarding people who are already in the process of defaulting, it lends a hand to responsible people who are up-to-date on their mortgages.
Unfortunately, of the 4 people I know who are in this situation and theoretically eligible, ALL of us have been told by our different banks that they are not participating. And why should they? Chances are, if we were going to default, we would have already, so what’s in it for the banks?