Politicians and bureaucrats proposed many bailouts ostensibly to benefit homeowners that really benefit banks. Loan modifications are a classic example. Politicians crafted these programs to “keep people in their homes” when they merely transferred a few more payments to the banks before the borrower imploded. Each time they bring out a new program or proposal, it’s always sold on the merits to “struggling homeowners.” The best thing for most loanowners would be to put them out of their misery in a foreclosure, but that would cost the banks billions of dollars, and politicians would have to listen to the sob stories of millions of voters, so alternatives that transfer these losses to US taxpayers are frequently explored. Today we have another proposal to save loanowners. The real result is to transfer losses from banks to taxpayers, thus this proposal should be opposed.
By Bloomberg News — on January 29, 2013 at 12:03 PM, updated January 29, 2013 at 12:20 PM
Underwater homeowners may get additional federal assistance for refinancing government-backed loans under a proposal being revived in the U.S. Senate.
Democratic Senators Robert Menendez of New Jersey and Barbara Boxer of California plan to introduce a bill as soon as this week that would expand the existing Home Affordable Refinancing Program by promising lenders they won’t be forced to absorb the loss on refinanced loans that default, according to a person with knowledge of the matter. The person asked not to be identified because the timing is not final.
Delinquent borrower’s loan is currently held on the banks’ balance sheet. Bank contacts the loanowner and offers them the ability to refinance with a government-backed loan under generous terms if they will only agree to make a few payments. Once the borrower agrees and makes three payments, the loan becomes a “permanent” modification, and the liability for future losses transfers from the bank to the US taxpayer. This is an outrageous attempt to make taxpayers pay for the losses on the stupid bubble-era loans polluting bank balance sheets.
The bill is the first of a series of measures planned by the White House and congressional Democrats to promote refinancing as a way to spur a recovery of the housing market.
The Menendez-Boxer bill, a new version of a measure that failed to advance in the last session of Congress, would include a one-year extension of HARP, which is aimed at helping borrowers who are current on their mortgages but unable to refinance because their home values have dropped. The program, which applies to loans backed by U.S.-owned mortgage finance companies Fannie Mae and Freddie Mac, is set to expire at the end of this year; the bill would extend it through 2014.
“We believe the legislation — if it could be adopted — would be positive for the mortgage originators by giving them more time to find borrowers eligible for HARP,” Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC, wrote in a market commentary today.
Banks including JP Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. could benefit, Seiberg said.
U.S. residential real estate lost about a third of its value after home prices peaked in 2006. Prices are now rising again, shrinking the number of underwater properties, worth less than the mortgages on them. There are now about 7 million underwater properties, down from 11 million in 2011, according to JPMorgan.
The Obama administration has been pushing widespread refinancing for homeowners who have been unable to take advantage of historically low interest rates because they are underwater on their mortgages.
The effort got a boost last October from changes to HARP that allowed homeowners with loans backed by Fannie Mae and Freddie Mac to refinance no matter how much their loans exceed the value of their homes.
That was outrageous too, but at least it didn’t directly add to the losses to be absorbed by the taxpayer. It indirectly did because the GSEs will make less revenue on the modified loans to offset other losses, but the policy did not add any liabilities directly to the US taxpayer. Today’s proposal does.
In a letter supporting the new bill, the National Organization of Realtors said it “offers relief to homeowners who continue to meet their mortgage obligation during this on- going period of economic unrest.”
Menendez and Boxer were unable to pass the bill during the last session of Congress because they were unable to garner Republican support without opening up the measure for amendments.
Passage also is not assured this session, Seiberg wrote.
“We detect little support among House Republican leaders,” he said. “So even if it can pass the Senate, it may well die in the House.”
About 1.8 million homeowners have used the HARP program to refinance since the program began in 2009.
This will be an interesting issue for Republicans. The fiscally prudent ones will recognize the huge transfer of liabilities as the stealth bailout it is and oppose it. The Republicans who are owned by the banks, which is many of them, will be instructed by their campaign-donor masters to pass the bill to bail them out. If enough Republicans are in the pockets of the banks, this measure may pass. After all, they need to provide assistance to struggling loanowners any way they can, don’t they?
Move-up to move-out (after 4 years squatting)
The former owners of today’s featured property followed the typical OC pattern that previously defined the move-up market. They purchased the home with a significant down payment, likely from a previous sale. But then also in typical OC fashion, they discovered they could access their equity for lifestyle expenses, and they proceeded to piss away their equity, default, squat, and finally get pushed out in foreclosure.
- This property was purchased on 6/28/2004 for $1,450,000. The owners used a $950,000 first mortgage, a $160,000 second mortgage, and a $340,000 down payment. Today’s asking price represents a significant discount from the original purchase price in 2004.
- On 10/5/2004 they opened a $50,000 HELOC.
- On 3/4/2005 they obtained a $290,000 third mortgage from a private party.
- On 3/14/2005 Wells Fargo gave then another $250,000 HELOC.
- On 5/10/2005 Wells Fargo gave them another $100,000 HELOC.
- On 8/15/2005 the third-party lender gave them another $240,000.
- With all the HELOCs, seconds and thirds, it’s difficult to tell exactly how much they owed, but suffice to say they extracted all their equity and then some.
- They quit paying in late 2008, and they squatted for four years. As I’ve noted in previous posts, the higher up the property ladder they are, the longer they have been allowed to squat. Think about that, after extracting hundreds of thousands in mortgage equity withdrawal, these people were allowed to squat for over four years. Unbelievable.
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Proprietary OC Housing News home purchase analysis
$999,900 …….. Asking Price
$1,450,000 ………. Purchase Price
6/28/2004 ………. Purchase Date
($450,100) ………. Gross Gain (Loss)
($79,992) ………… Commissions and Costs at 8%
($530,092) ………. Net Gain (Loss)
-31.0% ………. Gross Percent Change
-36.6% ………. Net Percent Change
-4.2% ………… Annual Appreciation
Cost of Home Ownership
$999,900 …….. Asking Price
$199,980 ………… 20% Down Conventional
3.96% …………. Mortgage Interest Rate
30 ……………… Number of Years
$799,920 …….. Mortgage
$197,112 ………. Income Requirement
$3,801 ………… Monthly Mortgage Payment
$867 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$250 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$175 ………… Homeowners Association Fees
$5,092 ………. Monthly Cash Outlays
($877) ………. Tax Savings
($1,161) ………. Equity Hidden in Payment
$273 ………….. Lost Income to Down Payment
$145 ………….. Maintenance and Replacement Reserves
$3,473 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,499 ………… Furnishing and Move In at 1% + $1,500
$11,499 ………… Closing Costs at 1% + $1,500
$7,999 ………… Interest Points
$199,980 ………… Down Payment
$230,977 ………. Total Cash Costs
$53,200 ………. Emergency Cash Reserves
$284,177 ………. Total Savings Needed