Mortgage Bailouts III: The Sucker Trap
I know it is a hopeless fight, but I want to do my part to make sure people know who is really going to be helped by a mortgage bailout. The last two times I ranted about this (I, II), there was no specific plan on the table but I was pretty sure that any mortgage bailout would really be a plan to help lenders, dressed up as help for homeowners.
Well you may have heard that George W. Bush is riding to the rescue with a generous plan to freeze ARMs at their teaser rates so many poor homeowners can avoid foreclosure. How generous! And no taxpayer money is needed! What genius!
OK, let’s look a little at who is going to be helped. A homeowner is only eligible for the plan if they have no more than 3% equity. If you have less than 3% equity, the lender will face a certain large loss in the event of foreclosure. If you have less than 3% equity, there’s a good chance that foreclosure is in your best interest. Here’s Mish’s take:
This plan will benefit homeowners who meet ALL of the following requirements.
- The homeowner has at most 3% equity
- The homeowner is not hugely underwater on current loan to value.
- The home is in an area where home prices are not apt to plunge over the next few years.
- The freeze will permanently prevent foreclosure.
It takes all four conditions before homeowners will benefit. The plan has negative benefit for nearly everyone in the small select group of people that meet the carefully crafted eligibility requirements. I find this plan galling.
Galling indeed. Unless you’re a lender. I’d even take issue with one of Mish’s points: I think that if you qualify for the plan and house prices simply stagnate, you’ll probably come out behind. They don’t need to plunge.
Now here is an interesting thought: anybody who qualified for this plan would almost certainly get their loan modified even if the plan never existed. The lenders do not want to foreclose on these people, and will happily take a smaller interest payment if they can avoid it. So why does the plan exist? I see two reasons.
- It lets the Bush administration help out Wall Street while appearing to help the little guys.
- The fanfare over the plan will help people get excited and sign up if they qualify, feeling special to get this “help.”
Don’t fall for it.
[...] looks at Bush’s mortgage relief plan. Turns out, it’s mostly banks that will be relieved. No big surprise there. Also turns out [...]
Sun-day-links « JD2718
December 9, 2007 at 1:59 pm
Mortgage Bailout? There is no mortgage bailout. This plan was signed on about 2\15\2009 and of this day not one person has received assistance. Or at least not one back can/will provide any information (public under Law)
It is the most profitable government plan for banks ever made law. Here is how it works … you apply with your lender (in this case Wells Fargo) They give you a boiler room type sell on letting them work it out for you. They then re-qualify people who could not qualify in the first place for an interest deferred loan .. payable at time of sale or 5 years , whatever comes first. What do they get?? The first thing they get is the application fees (of course deferred,with interest for 5 years or sale) that cost thousands of dollars to the borrower, then instead of taking a loss by reducing the payment to 37% … they actually make a profit. The topping on the cake is they get to keep the $25 billion the government gave them to cover there loss. I can back up every allegation .. lets start by finding one person whose mortgage was reduced (not refinanced) under Obama’s plan,
Bill Maguire
April 11, 2009 at 10:51 am