Obama May Press Banks to Cut Mortgage Payments

This is a wonderful idea that will sound good but won't help many. If you want to understand the problem you need to look beyond the obvious. The obvious--about 9 percent of all mortgages outstanding are delinqunet or in foreclosure. The number of homes going into to foreclosure is forecast at 3 million plus. But, how accurate is that number. Down here in Florida banks are dragging their feet on foreclosures. Delinquent right now, expect 1-2 years before the foreclosure happens. So, its likely that time bomb is still ticking.

Let's say they gave every eligible owner a fixed rate mortgage at 4.5 percent. How many home owners would this benefit? How many of these delinquent owners can afford that price. Next let's say they "cram" down the mortgage to near market prices? How many would benefit? Does anyone know the answer to these questions? Does anyone have a number on what it would take to bring supply and demand into balance.

Supply and demand is really the critical issue. Here is what we know. An enormous amount of buyers bought their houses with zero down. So they started with zero equity. How many buyers bought their houses with zero documents? How many NINJA loans are outstanding--no income, no job, no assets. How many Toxic Option Arms?

Wouldn't it be a good idea to first understand the size and dimensions of the problem. To define the problem and then devise the solution? I guess not.

From the NY Times:

President Obama’s plan to reduce the flood of home foreclosures will include a mix of government inducements and new pressure on lenders to reduce monthly payments for borrowers at risk of losing their houses, according to people knowledgeable about the administration’s thinking.

The plan, to be announced Wednesday, is expected to include government subsidies for reducing a borrower’s interest rate, which a lender would have to match with its own money.

Subscribe to All American Investor via Email

More from All American Investor

Ray Dalio on the current state of affairs in the market

Homebuyer Credit Won’t Stabilize Market, Analysts Say

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

Six Errors on the Path to the Financial Crisis

Who Caused the Financial Crisis?

Option ARM--The Toxic Mortgage

Debt Binge--The Perfect Financial Storm

Bailing Out NINJA Homeownwers will never work

Bailing out homeowners will never work. What is the government going to do about some one that was never qualified to buy a $500,000 dollar home in the first place.

To start out, the homeowner bought something that was overvalued and is not likely to return to that price in the next decade. The value today might be $300,000. This leaves the buyer with a net worth of negative $200,000 to start. Once their NINJA loan trips from the teaser interest rate to an at market interest rate they can't afford to pay the monthly mortgage. What makes the government think they will be able to pay a $300,000 mortgage? Wouldn't they be better off renting an apartment (or for that matter a house) they can afford? I often think, where did these buyers come from in the first place? Were they a first time buyer that was enabled by the "scam" being perpetrated in the housing market? Did they sell an existing home and put the gain down on the new, bigger, inflated home (not likely)? Are they credit worthy at any price?

I finally read a good article about the so called housing bailout over on the Wall Street Journal.

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.

Why Be a Nation of Mortgage Slaves?

*****NINJA loan--no income, no job, no assets

Subscribe to All American Investor via Email