“We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners,”
“Obama’s plan may expand on the Federal Deposit Insurance Corp.'s streamlined loan modification program, which serves as a model for workouts being conducted by several banks and by Fannie Mae and Freddie Mac.”
“Servicers aim to reduce payments to no more than 31% of a borrower’s monthly income. So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers.”
“We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners,”
Hmmm…you gotta wonder, if people are so “economically stressed” that they need government aid on their mortgage payments, how are they “responsible homeowners”? I would think a “responsible” homeowner would be the one who bought a home that he/she is able to afford on his/her own WITHOUT government aid…
I understand what you are saying, but it just seems to me like they are rewarding the people who had the poor planning that got them into that situation in the first place.
I also don’t understand finances all that well, but that is just my $0.02.
I can understand if there is a layoff and the only source of income is now gone, and the mortgage was doable while employed. But if people couldn’t afford it in the first place I don’t have too much sympathy except that many people are so excited when they get told how much money they can have that they stop thinking clearly.
When we bought our place almost 10 years ago they approved us for $100,000 more than we wanted to spend based on monthly mortgage payments. We didn’t even look at houses in that range because I knew I would find one I really wanted. I told our agent that we wouldn’t look at anything over $xx and he respected that. Took a lot of self control but that self control came back and saved us over the last couple years with unstable employment between the two of us.
People don’t know how to manage money, I barely do, and there are a lot of mortgage brokers who made a lot of money off of them. Fingers can be pointed in both directions. I don’t know if it is up to the government to save everyone’s home but I don’t see a problem with offering a way to refinance so that those who have lost their job can stay there. Those who were just irresponsible, tough.
I can see how somebody that was “responsible” and bought a house could be in financial trouble as a result of a job loss but let’s face it, most people that bought between 2004-2008 or did a cash-out refi between those years couldn’t really afford it, especially when they had to rely on an ARM payment schedule. This might sound like a pretty wide statement but for the majority it does apply. I would like to see the DTI ratio of those people at the time they took the loan and how realistic it was that their income was a guaranteed income for the next 5-10years…
The Government and the Fed should stay out of price fixing.
I just hope that this plan automatically disqualifies anybody that did a cash out refinance.
Jen, we were in the same boat as you when we bought our house 6 years ago. We were making combined well in excess of 6 figures, but told our agent we only wanted to see houses below 200K be cause we knew we’d likely be having kids soon and we wanted my wife to stay home. She still showed us the big houses, but fortunately we had been living in an 700 square foot flat in London before moving here so we knew what we wanted…small house with 15 year mortgage on my salary only. Like you it would have been easy to jump into one of those bigger houses, and we seriously thought about it. I don’t blame the homeowners as much as the mortgage companies that agreed to finance these questionable people. But…I don’t think either should be bailed out and should be forced to live with their decisions.
I took a second job to help raise the money to buy my house, and to pay off some college debt. Nothing like working 40 hours a week then working a couple of nights/weekends at the mall…
I always wondered why people who got in money trouble didn’t just get a second job. I suppose these days finding a second job would be impossible.
I squarely place the blame on the homeowners, period. They signed the papers. They “knew” it was too good to be true. I always wonder why people would sign up for a mortgage but not have any emergency fund. Do they think they are impervious to “Murphy’s Law”? In almost every case of these folks that have been laid off, if they would have had 6 months of cash in the bank, they could weather most any storm.
Jen made some great points, but the only one I would disagree is the comment about its hard to manage your finances…its really not. It may suck to manage your money cause you have to make choices, but its not hard.
Congrats to both of you for living well within your means…now if we could just get a few others to do it.
One great stat I heard yesterday was that the savings rate in December was 3.8% (compared to a negative rate over the last decade) - this is great for the long term but does impact us in the short term. Its all about choices. I think we need some short term pain to get some long term gain.
Same thing for me. When I bought my home, I was told I qualified for a mortgage I would NEVER consider! But I guess it’s easy to fall for it, get a huge home and realize after a while that when you factor in car payments, etc. it’s just a stupid idea. The 28/36 DTI is really too weak. Actually, it’s pushed up to 41 with an FHA loan! moreover, many lenders will simply play with the numbers to qualify you anyway…
Totally agree with your whole post. I have zero sympathy for anyone who bought waaay more house than they could afford, or couldn’t be bothered to read the fine print on their adjustable rate mortgages (ie, your payment could just as easily go up as opposed to down). Different story for those people who have been laid-off, or have had a major health issue crop up and crush their finances. Those folks I have no issue helping out.
I have zero sympathy for anyone who bought waaay more house than they could afford, or couldn’t be bothered to read the fine print on their adjustable rate mortgages (ie, your payment could just as easily go up as opposed to down).
I think most of you are missing the point… that we are looking at a major disaster (yes another one) if people who are upside down on their mortgages walk away from them. This is in fact the smart thing for them to do.
Sympathy is irrelevant (I have zero for them). It is simply much better for our overall economic health to not have a huge number of defaulted loans and foreclosed homes.
The fault lies squarely with the regulatory agencies IMO. It is simply insane to encourage lenders to give out zero down loans with no check of a person’s income or debts… and this practice was rampant! Why not buy a house as an “investment” if there is no risk for you? Prices always go up right? Buy that house and flip it for $100k profit in a year or so, or borrow against your increase in equity… easy money.
I can’t even say these people were stupid or foolish. Why not do this if you have zero downside risk?
I figured out how much I wanted to spend on morgage every month and found the house that fit that. It was tough to do out here in the Northwest but we did it.
I think most of you are missing the point… that we are looking at a major disaster (yes another one) if people who are upside down on their mortgages walk away from them. This is in fact the smart thing for them to do.
I’d say debtor’s prison but then we’d have to pay for the prisons.
Greedy mortgage brokers, bad regulation, and poor buyer judgement. Plenty of blame to go around.
I disagree with you that it is a regulatory issue. Sure, by letting the free market deal with things it could get out of hand but at the very same time the free market would put things back in order and balance. I don’t think it was a regulatory issue. Sure, Lehman did a $1M loan, 100%, with stated income. Totally stupid and reckless, nobody can argue that. Yes, there wasn’t anything to regulate them from not doing so. But I think that was just a small part of the problem. The real problem comes from the source that made all that money available for lending. And that is the Federal Reserve as they are the ones in charge of the money supply and interest rates. Had they not made money as cheap and easy to get a hold of, Lehman and others wouldn’t have been able to do what they did. Had the Fed not manipulated short term rates and actually let the free market decide what rate would be appropriate, it would have never been lent so inexpensive. And are you really sure that by going further into debt and keeping those people in their homes we are actually doing the right thing as a country? What does that teach us individuals about financial responsibility, what does it teach future corporations when they see how there is a Federal Government safety net to reckless business practices.
I totally understand that too many empty homes could cause an increase in crime activity. But those homes do not have to be empty. There are plenty of responsible people out there willing to buy - they just aren’t willing to pay those still inflated prices. It’s not like a house is not a wanted commodity, a transaction will take place when the price is right. What we can’t afford right now is the government attempting to price fix and prolong this inevitable market collapse (whether in nominal or inflation adjusted terms).
I’m in 100% agreement with you. If you put nothing down and have nothing to lose but everything to gain, why not bet into overpriced and over leveraged Real Estate. You sign a contract and if you can’t hold up your end of the deal the trustee can sell that property to compensate the lender for some or all of the losses. I also have no problem with a lender changing the terms of the loan. It’s their note and if it makes more sense to them to lower the principal and/or change the terms of the loan to prevent foreclosure than so be it. That’s just a business decision and sometimes it makes sense to take small losses instead of a bigger one. What I do have a problem is when the lender depends on government funds to make those changes because I do not appreciate to be taxed and see further tax increases for a bad business decision of somebody else.
In effect, with this entire bailout we are subsidizing bad financial practices. On both, the corporate and individual level. Actually, it was the GSE Fannie and Freddie that have been subsidizing this mess for a long time…imagine how the RE and credit market would look like in the absence of those two agencies and with short term rates set by the free market instead of some quasi-private banking cartel. Many people that shouldn’t be homeowners couldn’t have gotten a loan and many that are responsible and got a better interest rate because of those GSEs would have less favorable loan terms - but RE prices as a whole would be much lower and affordable. The winners would be Americans while the banking cartel wouldn’t have us debt slaves for as long as they now have us for.
Sounds like a classic prisoner’s dilemma situation.
If you are upside down, walking away is the smart thing to do, when the situation is in isolation. But when all upside down homeowners walk away, it ends up being drastically worse for the individual due to the overall economic impacts.
Had they not made money as cheap and easy to get a hold of, Lehman and others wouldn’t have been able to do what they did.
Low interest rates are good. The problem was a lack of down payment by the borrower (ie their investment), and a lack prudence on the part of the lender… since they could just repackage the crap and sell it as a “low-risk” mortgage backed security.
What does that teach us individuals about financial responsibility, what does it teach future corporations when they see how there is a Federal Government safety net to reckless business practices.
The problem is that these people and institutions did not “break the rules”… hence their is no legal recourse. I’d be in favor of lynchings for people who surely knew better… that would send the right message.
Otherwise our recourse is damage control and putting policies into place that will prevent this from happening again.