The Glade 4.0

It encourages more bad behavior, either directly through this program, or as indirect consequence of being "bailed out" by the government. Higher interest rates are generally a consequence of poor financial decisions such that the risk of lending to this person is related to the interest asked as return for lending the money. Nothing you don't know there obviously.

So now we have the government providing interest rates lower than can be obtained by those who did things right, managed their finances and bought within their limits.

Whats more, I seriously suspect that there is no rule regarding the amount that can be borrowed, just up to the 115% (or whatever it is this time) of the value of the home. Sounds reasonable, but the rule should be up to the principal still on the loan, such that people can't "cash" an extra few thousand dollars on their home equity at this great low rate. What is the likelihood that should people be allowed to do this, they will use those funds to lower other, higher interest debts? Next to none, but instead incur new debts, financed by taxpayers (who are also likely not the ones that can qualify for these lower rates).

Ladas, your statement confuses me. How is the taxpayer paying anything for this?

Option 1) Let these people default and drive my home value down further
Option 2) Let these people refinance at a lower rate which they can afford to pay
Option 3) ???

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Fannie and Freddie aren't self sufficient and their operations are heavily funded by the federal government.

The money they are handing out at such low interest rates (lower than the market bears for the risk) is supplied by the taxpayers. Is the special interest rate given to "these" people higher or lower than the interest rate the Federal Government is paying on its debts? Who makes up the difference?

These mortgages are already backed by Freddie and Fannie before the refinance. This is essentially protecting our investment. 6.5% of nothing when they default on top of the drop in value of the investment due to flooding the market with more foreclosures < refinancing them at 3.5%.

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IF, and this is the big if, two things don't happen... those refinances are limited to the actual principal left on the mortgage, and not up to 115% (again, or whatever amount is being tossed around) of the value of the home. Anything above the principal is cashed out equity and an extension of debt at taxpayer expense. How much of this will occur? No idea, as this information isn't available.

Secondly, the premise that we are "protecting our investment" hinges on the likelihood that these people already in financial trouble will use the savings to pay down other debts and not consider the difference in payments as spending money, leaving the mortgage holder (us) in the same position as before.... people with debts they can't handle.

No one. The original loan gets paid off with the new one, homeowner pays closing costs. This is pretty standard procedure. The only difference is that Fannie and Freddie back a new loan at 125%. They are already doing this since the home loan for the underwater homeowner is already at 125%.

Again, only if the amount of the refinance is limited to the remaining principal, or 125%, whichever is less.

And of course, the problem with the arguments you have presented is there is no discussion thus far in this "new" plan to revise the rule that only allows those home owners who are current on their payments to qualify. People not making payments because they can't afford them need not apply.

But then, which part of the mortgage being more than the home value is actually a problem? Lots of things that people buy decrease in value compared to the purchase price. This is only an issue if they try to sell the home now, and having a lower interest rate and still being underwater isn't going to help that problem.

What Arathain said. The problem is this, I financed my home at 125K; my neighborhood foreclosed to **** and now my house is worth 100K. I still owe 125k @ 6.5% and can no longer afford the interest but I could at 4.5% so I refinance my existing debt of 125k @ 4.5%. Bank wins because they don't have another foreclosed house to try to sell and still get their 125k + interest; I win because I can keep my house; my community wins because my house doesn't fall into the foreclosed and price-slashed category that drove down my house value to begin with.

This is not a home-equity cash-out scheme. You can only refinance the outstanding portion of your mortgage.

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No, it doesn't. Not in this case. First, this is only applicable for houses that have tanked in value. You're maintaining the value of the loan, so nobody's being bailed out. You're paying closing costs to cover the bank's cost of the paperwork, etc, so nobody's being harmed. You're refinancing at a lower interest rate, and paying off the previous loan, so again - nobody's being harmed. In this case, since we're talking about people that have made their payments, their high interest rate is not the result of bad decisions, it's a result of time, and the economy. For example, I'm currently paying 6.5%, because of when I purchased my home. Interest rates have dropped substantially since then. It has nothing to do with bad financial decisions.



No, that's not accurate at all. The interest rates are the interest rates. If you owed only 50% of the value of your house, you could easily go and get one of these in a refinance. A guy that's slightly underwater cannot currently.



I don't know, but I agree with you here.



I strongly hope they don't allow this. Just take the current debt, already backed by Freddie and Fannie, and let them refi it - IF THEY'VE MADE THEIR PAYMENTS. If they haven't made their payments, they may not be able to under the new interest rate anyway, and shouldn't have the cash for closing on hand.

Mostly, I think it will be guys like me, who are making their payments but want a shiny new 3.5%.

Additionally, there will be people that are making their payments, but are underwater enough to be thinking about just walking away. If we can stop them from doing it and encourage them to pay the 120%, then it's a win.

I included when you originated the loan as a factor in your current interest rate when I was drafting that reply, but I deleted it due to fact that interest rates prior to the collapse were already very low, so any loan with a significantly higher interest rate would have had to been much older (and not refinancing then was a poor decision on the part of the home owner), and secondly, we are talking about loans currently held by Fannie/Freddie. These are high risk loans and/or high value loans just by the nature of who holds them. We are not talking about home owners such as yourself, who I'm sure don't have your mortgage though one of those two organizations.

Banks were holding onto the good loans, bundling and selling the risky loans to Fannie/Freddie.

Regarding the interest rates that can be obtained by various groups, I could be wrong, as I haven't seen any real numbers, just the 3.5% being tossed around here. I haven't checked in a couple months, and these shift, but that is substantially less than what is currently available on a jumbo loan (kind held by F/F) or even a typical loan. Today's rates for Wells Fargo for a 30 year fixed are 4.25%, 4.375% for Large and 4.75 for Jumbo. USBank has 3.875% and 4.25% Jumbo. I haven't checked much past that, but that USBank 30 year conforming was the lowest I saw.

Now, unless your loan is currently held by F/F, you don't qualify for that special 3.5% rate (if that is what it is), so it doesn't really apply to guys like you.

As for those who are making their payments but thinking about walking away... those are the people that make poor financial decisions. If they can make the payments, presumably they can afford the house, and it doesn't matter the value of the home versus what they owe, unless they are trying to sell it, which again comes back to the concept of things losing value after purchase on a wide spectrum of products.

So before your neighbor had his house foreclosed and your property value fell, you could afford the 6.5% interest, but now you cannot? The change from a 6.5% rate to 4.5% rate on $125,000 principal is about $130/mo. Are you going to be able to find a place to live in your area for $760/mo? If so, what is the trade off?

And again, what does it matter if your house is currently worth less than what you paid? Are trying to sell it? Are you using the equity in that house to finance other debts, or part of a home equity line that has been called?



I would love to think that is the case, but I doubt there are any rules in place to prevent this. Do you have some literature you could link that lays out all the rules for the current plan that isn't working and/or proposed changes to the plan to widen the appeal?

It matters because it's nonrecourse debt (either legally or de facto) unlike most other things bought with debt. If my house becomes worth too much less than what I paid I get to walk and stick everyone else with the tab. Also, the drop in price isn't due to depreciation like it is with something like a car, I can't sell my car and buy a similar-quality car for that amount of money, I most certainly can with a house.

I don't think you realize the potential tax liabilities for walking away from a loan like that, much less the other ramifications. Also, and I can't tell by your wording, but you don't get to magically walk away from the mortgage once the value to principal hits some ratio. Anyone could do the same, regardless.

But your argument is irrelevant, since "being underwater" is not something even remotely addressed by this plan, or the proposed changes, since lowering your interest has no immediate effect on your principal. You could feasibly argue that the person benefiting from this reduced monthly required payment would continue to pay the same amount such that the "savings" would be applied as additional principal curtailment, but we both know that isn't going to happen, and even if it did at some small percentage of holders, it would take years to realize the change. Using Hopwin's hypothetical example of a principal of $125,000 at 6.5% versus 4.5% and a new value of $100,000, it would take 16 years for that interest savings to offset the loss of $25,000 in value.


Can you please point out where everyone is entitled to have their home values appreciate? It isn't in my copy of the Constitution, nor is it in my home mortgage contract.

And then after you fail to find that, can you explain to me how the existing plan, or the proposed changes, in any way has influence on this situation?

He is operating under the flawed assumption that people have a right to a return on their investments.

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Ezekiel 23:19-20 

Ladas, let's get back to the topic at hand first if you don't mind. What is the taxpayer liability for this? I am still confused by that piece and it's hard for me to get to other related topics without revisiting that first.

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The taxpayer liability is that we now own FNMA/FHLMC due to the fact that they have been delisted by the NYSE and subsequent conservatorship. The US taxpayers are, essentially, holding the notes and receiving the interest payments. 90% of their loans are paid on time; if these new loans go through there will be less income with which to pay off the hundreds of billions of dollars we bailed them out with.

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"Dress cops up as soldiers, give them military equipment, train them in military tactics, tell them they’re fighting a ‘war,’ and the consequences are predictable." —Radley Balko

This is what I wrote that included the comment about increased costs to taxpayers with the conditions of that statement:

Whats more, I seriously suspect that there is no rule regarding the amount that can be borrowed, just up to the 115% (or whatever it is this time) of the value of the home. Sounds reasonable, but the rule should be up to the principal still on the loan, such that people can't "cash" an extra few thousand dollars on their home equity at this great low rate. What is the likelihood that should people be allowed to do this, they will use those funds to lower other, higher interest debts? Next to none, but instead incur new debts, financed by taxpayers (who are also likely not the ones that can qualify for these lower rates).

Using a fictitious example, house is worth $200,000 in today's market with a principal remaining on the mortgage of $230,000. If the owner is allowed to refinance up to 125% with no restrictions such as I said above, then the owner could refinance up to $250,000. That's $20,000 in phantom equity paid to the owner, financed by taxpayers.

You have stated there is no ability to cash out any "equity", but I have not yet seen any evidence to support that claim. If it exists, then the chance for additional taxpayer funds is next to nil (under this program, Obama has lots of others proposed) and I retract my concern.

This is also not considering the recent report by FHFA that the continuing bailout of Fannie and Freddie will cost taxpayers between $221 billion to $363 billion by 2013, including the $148 billion they've already received. Considering the interest rate being paid by these two organizations to finance their activity, lowering the money collected isn't going to help this situation. Fortunately, the pool of people that will actually qualify for this program is small compared to the loans held.

Cool, can I, as a taxpayer, repossess a FM house that was foreclosed on?

Your share will be ~1/230million of that house.

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"Dress cops up as soldiers, give them military equipment, train them in military tactics, tell them they’re fighting a ‘war,’ and the consequences are predictable." —Radley Balko

Woot!

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Yes, anyone could do the same, it just gets more and more likely the more underwater people are. I don't know all the ramifications but they can't be that severe when I read figures that claim up to one fourth of all the crash's foreclosures are strategic defaults. Also there is no tax liability for strategic default, at least not federal tax, due to the Mortgage Forgiveness Debt Relief Act.



It's still a disincentive to strategically default. Someone who realizes they're going to have to pay out $500,000 to pay off a house worth $200k is a lot less likely to just walk than one who realizes they'll have to pay $600k.



Except for the fact that if you bought a house in the early 2000s you had basically everyone from the government to the media to the banks to the ratings agencies pretty much all but outright stating that you did have a right to appreciating home values. The mortgage securities were AAA rated. The "virtually no risk, perfectly safe, nothing can possibly go wrong" rating. You can hardly blame these people for taking on these mortgages when the "experts" were all telling them it was a great idea.

Some might have been smart moves, but calling something "strategic" doesn't absolve the tendency of people to be stupid. That said, yes the act you cited does prevent people from having to pay taxes on debt forgiveness for their mortgage. It does not provide the same relief from home equity loans and forgiven balances. I don't know the exact percentage of people that held home equity lines, but before the crash it seems to me it was pretty high.

By the way, those ***** about how their property values have fallen due to foreclosures... thank Obama and this Act.


I'm not sure what direction you are taking with this statement. If you are talking about changes in home value, you made the wrong adjustment, and are grossly inflating the actual drops in home values. If you are talking about total amount over the course of a 30 yr fixed loan, you are again changing the wrong numbers.


Yes I can, and I do.

That act was passed by Bush in 2007, I guess you could blame Obama for extending it.



I'm talking about the total amount the homeowner has to pay out on his mortgage. If he refinances from say 7% interest to 3.5% a $100k drop in his total payout is not a far-fetched estimate.



You expect the average person to call bullshit on the major ratings agencies staffed by hundreds of economists whose job it is to rate the risk of securities? Really? Maybe now that position would have some merit after everyone knows they screwed up, but not in 2004.

I don't think you understand how Fannie/Freddie work.





I have a loan through Nationstar. It's backed by Fannie. You mention Wells Fargo, most of their loans are backed by Fannie or Freddie.