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