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Mortgage Assistant Plan

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July 21, 2010 – Comments (8)

I am reading Rosey's blog on the Mortgage Assistant Plan and I have comments of my own.

Rosey quotes:

The Obama plan was designed to help people in financial trouble by lowering their monthly mortgage payments. Homeowners who qualify can receive an interest rate as low as 2 percent for five years and a longer repayment period. The average monthly payment has been cut by about $500 on average.

 And his comments are:

This might be the dumbest part of the plan..........shear stupidity. We are going to give someone who has failed to make loan payments and has entered into a real estate purchase and/or loan they had no business getting into in the first place, and reward them with a 2% interest rate on their loan.

 I only agree with the first part of the comment,"the dumbest part of the plan."  I disagree that it is a reward, more I think it is just moving the problem of those who can now actually afford the payments down the road 5 years and here's why.

Mortgages were already 30 years, and I have repeatedly brought up reasons why 30-year mortgages should not and never have been allowed.  The history of the 30-year mortgage is that it came about during the great depression as a means to deal with the excessive debt problem and imho was the single most important reason for the depression.  A 30 year mortgage should only be used as an option to help people who have gotten in over the head and should not be the industry standard as it is now.

When you do not change the interest rate and draw a 30 year mortgage out and say change it to 40 years, the reduction in payment is so small it is completely unlikely to make any difference.  Hence, this plan, draw it out and reduce the rate as extending the term alone is almost useless.

At 2% and a long mortgage almost nothing goes to principal.  In 5 years homeowners will owe very close to the same amount.  If they then have to renew at say the very low rate of 3%, well, the interest cost just went up by 50% and the homeowner is right back into the problem as the interest cost of the loan goes up by 50%.  Who thinks wages will be up 50% in five years?  And what if the rate is 4%?

The only way this plan could help, and if you have read my six degrees of leverage you know that the help would only be marginal, is if the term stays the same and the difference goes to principal reduction.  Thirty year mortgages still have way too much going to interest.  In 5 years you then have a few more options, you can extend it back out to 30 years for marginal help and the reduced principal also helps marginally.  Anyone who survives the 5 years will likely need another modification.  If it is 40 years, extending 35 back to 40 does almost nothing.

So, it looks like much longer term downward pressure on real estate...

This plan is dumb...

 

8 Comments – Post Your Own

#1) On July 21, 2010 at 12:11 PM, mtf00l (45.20) wrote:

The plan isn't so much about helping borrowers as it is driving more revenue to mortgage lenders. Which in turn will drive more mortgage backed derivatives.

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#2) On July 21, 2010 at 12:24 PM, GNUBEE (28.54) wrote:

But what if the $500/mo allows the homeowner to extingush other debts that are gobbling up income. At the end of the five years they may well have enough "new" (not servicing the car payment or credit card etc) income to stay in their house?

All this assumes the homeowner will stick to an intelligent 5 year plan.

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#3) On July 21, 2010 at 1:22 PM, caterpillar10 wrote:

All true which is partly why 40% (so far) of these modifications fail anyway. The next wave of this starting to be deployed now is principle 'reduction' which is actually reduction of interest bearing principle.

Example: value of house w/ $300,000 loan has slid back to $200,000 market value so investor gives mortgage servicer, bank -whatever- permission to set aside $100K of principle as what is, in effect, a 'silent' or non-interest-bearing balloon payment that must still be paid off @ loan maturity, re-finance, or sale of the property.

This could work for people planning to stay in the house for a # of years. It takes less if any manipulation of rate & term to make the payment affordable and takes a long time to get approval as they pull IRS and other other records to assure that it's a primary residense w/ qualified reduction of income w/ enuf income left to actually make the new payment ect. ect. ect.

However,  while a pre qualified mod application is in progress the forclosure process goes on hold. I see a lot of this paper -     ' it's hard for a pimp out there' :)       

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#4) On July 21, 2010 at 2:43 PM, lemoneater (79.59) wrote:

I've heard in Britain that 90 year mortgages are not uncommon. Someone correct me if I'm wrong.

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#5) On July 21, 2010 at 3:38 PM, GNUBEE (28.54) wrote:

I thought the UK standard was 25yr?

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#6) On July 22, 2010 at 2:47 AM, dwot (70.92) wrote:

gnubee, I guess if they have short term debt that can be cleared that money can be redirected to pay the extra interest when the rate resets.

lemoneater, I didn't hear about anything that extreme when I lived in Britian, but 40 and 50 years...

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#7) On July 22, 2010 at 9:56 AM, lemoneater (79.59) wrote:

I'll ask the person that told me about 90 year mortgages if I heard correctly. I might have misunderstood.

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#8) On July 24, 2010 at 5:45 AM, maria431 (< 20) wrote:

The next wave of this starting to be deployed now is principle 'reduction' which is actually reduction of interest bearing principle.

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