Critique of the U.S. Mortgage Plan

For folks who don’t have the time or interest to read through the entire news item, which announced the unveiling of a US mortgage plan (to deal with foreclosures), it can pretty much be boiled down to the following two paragraphs:

“Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home’s current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.”

My take:

  • This takes away the incentive of people who do not qualify to keep making their payments. The people who have already missed three or four payments have already damaged their credit something awful, so their incentive to make even modified payments on a depreciating asset is already reduced, if not eliminated.
  • I don’t see this stopping the underlying problem, which is that people can not afford the payments. Once this small percentage of the worst troubled homeowners are helped, then more people will need loan modifications. The bulk of the loans that will be re-setting, have not even reset yet.

and…

“Banks and mortgage finance firms have a strong interest in trying to halt foreclosures. The market is already flooded with more homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures.”

My take:

  • Yes they have an interest in halting foreclosures… the same way a person has an interest in getting their money back after buying a stock at 100 and watching it go down to 30. Cry me a river. I don’t remember a single bank complaining when they were making hundreds of billions of dollars.
  • Yes the market is flooded with an oversupply of homes people can’t afford. Where I come from, this means the price is too high. Regardless of what anybody does, prices will come down anyway until the average household’s monthly payment obligations comes back in line with a reasonable percentage of that household’s income. And we now have a new problem, which is that incomes are going down and unemployment is going up.

Everyone has their heart in the right place on this attempt to help people, but the time for action was when banks were leveraging profits by 30:1. Now we are experiencing the de-leveraging process… and it is just not as fun.

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