Recent changes to the Obama Mortgage Program-What do they mean for you?
July 11th, 2009
The recent Obama Administration mortgage program to help homeowners refinance was initially established for homeowners that were no more than 105% of debt to current market value. To all of us in the industry this was frankly laughable. It was common knowledge that the deflationary spiral down in real estate nationwide has left many people 40-50% upside down with their properties relative to equity. The program recently just received a nice modification whereby it will allow homeowners to refinance up to 125% of debt over current market value. The administration also recently endorsed the Real Estate Short Sale as another free market means of solving a mortgage problem by adding small financial incentives for borrowers and lenders to participate. What does this mean for you?
This means that the policies are becoming realistic and we can put the news media hype and requests for urgent governmental initiatives as a means of calming the public aside. Now is a time for a long drawn out healing process that will include significant deleveraging. This is the only way people are going to be able to get their arms around their debt and get there personal financial house in order.
The change to the mortgage assistance program is primarily for FNMA & Freddie Mac existing mortgages and it does have qualification provisions. Certainly you must have a job and you must clearly be in a position to afford the repayment of the new loan. The government wants to facilitate the lowering of the national private citizens’ debt service but it does not want to assume a massive new wave of default liability.
Having said this, where does 125% of debt to market value peg the needle in the mind of most people? In my opinion, this change along with the incentive for short sales are two of the most realistic and truly valuable moves to help distressed homeowners since the crisis began. My reasoning is that these initiatives are realistic and grounded based on human psychology.
If you are gainfully employed and your family is settled in a home and your children are enrolled in the local schools, do you really want to bail on a home and dump the problem on your lender if the government will help you lower your monthly mortgage cost significantly thereby making it affordable to stay put? Realistically the answer is for you to stay put and lower your rates from the 6-8% range to somewhere between 4.5-5.5% range. When you work through the numbers the benefits far outweigh the personal hell you must face if you were to choose to leave the property. This positions the Obama program move toward a stabilizing factor then the previous unrealistic false hope before the change. This now makes the program a constructive option for those within the program parameters were as before the change the program was unavailable to the majority of those in need.
The short sale incentives also point the distressed people in the right direction. The government does not want the burden of backing homeowners that are in excess or 125% of value. Why? Clearly in the minds of all us when we see a bridge to recovery that is so far that we cannot see to the other side we look to take evasion and often panic actions to get out of a bad decision. This means default, foreclosure, or the more constructive short sale solution for you and your lender. The 125% threshold is a good fit for the administrations program to constructively address today’s problem where people in the 150% debt to equity area need to accept responsibility for their own solution. This is the area where the market simply needs to clear itself through the process of foreclosure or short sale. The government can help but can not afford to indirectly assume responsibility for everyone problems. At the end of the day you own your own mortgage problem. The lender did not lend you the money with the contingency that the economy would be good and your house would never deflate in value.
At the end of the day it is very interesting to see all the hype from the government programs beginning with the Barney Frank program that was initially announced in April of 2008. There was so much hype and false hope to calm the markets while the government quietly worked toward its primary motive to save the free markets from the abyss. The free markets have been saved and the healing process is upon us. It is going to take some real time. I say real because we are accustomed to V shaped recoveries. I think this one is going to take a couple more years until things get back to normal. The real positive is that the programs and initiatives are becoming realistic as they focus on human nature and realistic incentives to help people fix their own problems. No more bailout headlines and that is good for everyone.
Lastly, I would like to comment on an article in Barrons today that outlined the success and failure of Loan Modifications. Pick up a copy of Barrons if you are remotely considering a Loan Modification. Look a the re-default rates and think through the cost you will have to bear to achieve an affordable Loan Modification from your existing lender. I would use the comparison of opting to get on an airplane to flyer from Alaska to New York for a cost of 10-20K in forbearance and payments and you only have a 20% chance of reaching your destination. That means you spend the money and go through the personal hell over many months and your plane crashes in the mountains. Good luck if you are convinced your lender loves you enough to give you a loan modification. You have much better odds with the changes to the new government refinance program or the short sale solution.
The Real Estate Short Sale is once again the reigning champion of the free market solution. It is almost impossible to fight the free market solution to find a better alternative. For those of you wanting to learn more about the Short Sale as a means of avoiding foreclosure we welcome you to join our Free Trial at www.thenegotiatedsolution.com. It is free and will only cost you two hours of your time. You have probably spent months worrying and losing sleep not to mention the assets you have dissipated in the interim. Its time to learn about the short sale and its benefits.
Blogging from the front line of the housing crisis. GHunter







