For some time the Obama administration has been pushing a number of programs to help out homeowners whose mortgage balances are greater than the value of their homes. Recently the administration expanded a Fannie Mae/ Freddie Mac refinance program and in an effort to promote that program President Obama went to Reno, Nevada a little more than a week ago to visit Val and Paul Keller. The Kellers home is currently worth $100,000 but their mortgage balance is $168,000. In the context of this visit the administration has been emphasizing that the target of this program is “responsible homeowners”.
There’s only one fly in the ointment. When CNBC started thinking about the Keller’s financial situation the numbers didn’t seem to add up. When they dug a bit further they discovered that the Keller’s bought their home 14 years ago for $127,000. So how was it that the Keller’s ended up owing $168,000 when, if anything, their mortgage should have been well below $127,000?
CNBC contacted the White House, which revealed that the Kellers had actually borrowed an additional $51,000 in 2007 in order to pay down business debt so that Paul could retire. So CNBC raised the question of whether or not the Kellers really were responsible homeowners. If you click through to that article you can read a bit more about the administration’s defense of the Kellers as the type of responsible homeowners that the refinance program is meant to target.
I’m curious as to what you think so I set up the informal poll below. Do you think the government should be helping people like the Kellers? If you are reading this post outside of ChicagoNow you will probably have to click through to my original post in order to participate in the poll. At the bottom of this post I’m displaying the most recent poll results but you will need to refresh the page in order to see your input reflected in the results.
Here are the results thus far:
Should The Government Be Bailing Out Underwater Homeowners?
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No, they shouldn’t. However, since they are insisting on doing it, I think it’s only fair that they do it right. The attempts of the past (homebuyer tax credit, HARP 1.0) failed epically. Probably because they were designed by out of touch politicians instead of more affected laypeople.
Let’s pretend the overall consensus is that government should help people who are underwater. How do you distinguish between the folks who simply got a bad deal, the Kellers who at least sunk the money back into their business and the yokels who used their homes as ATMs and paid for vacations, cars and doggie massages?
I don’t trust government to get that right at all.
I guess you could look at the original mortgage balance and what the balance is now. But in principle I agree with you. The government rarely gets anything right.
Do you think investors — defined as people who intentionally bought a property with the desire to rent for a profit — and so-called reluctant landlords should be put in the same bucket and have the same set of refi restrictions?
If you’re going to make special refi allowances I certainly would not want to put these people in the same bucket.
There are too many subtleties and nuances for a program run by a behemoth like “the government” to work rationally or effectively.
If it were my program, I’d help those who didn’t borrow additional monies. While the Keller’s borrowed to “help” their business, they set themselves up for that debt, and the fact that their house has lost value is mostly irrelevant in this case. Instead of being underwater by $68k, they might have not been underwater at all, if they hadn’t borrowed against the house.
Finally, we still don’t know how long “underwater” will last, nor can we really say how far underwater they may be in a year, or 5 years. Every underwater situation doesn’t need to be “fixed”. Time may fix some of it. And you have to live somewhere, and pay something in the meantime. That your home has lost value is irrelevant, unless you’re trying to sell, or refi your original mortgage. We’re trying to set up homeownership as a “never fail” guaranteed proposition, and that’s just not possible or realistic.
Well put.
There should be a program in place. Both HARP 1.0 and now HARP 2.0 will be epic failures. This is expected given the bureaucractic involvement of over complicating the underwriting.
What is ironic is that both FHA and VA have had HARP like programs for years that allow streamline refinances so borrowers who are still in good standing can take advantage of lower rates, regardless of their property value. It is hilarious that Fannie/Freddie can’t create the same program without over burdening it with nonsense.
As for bailouts of underwater borrowers, I have mixed feelings. I believe there is a way to bailout owners who truly want to get their loans paid off and it we would be better off as a whole. Instead of lending at near zero to the Too Big Too Fail banks, the government could have lent to current homeowners and allowed them to refinance to 10 or 15 year fixed mortgages. This way they would actually have chance of at least paying the principal back even if values never recover. Most borrowers would have payments similar to what they were paying on 30 year loans at higher rates. As the principal is reduced, the borrowers are then in a position to sell at lower prices as they are no longer underwater. This helps new buyers as well. Refinancing borrowers who are 25% underwater back to a 30 year amortization so they can save $150/$200 a month isn’t going to fix the problem down the road when they have to sell for whatever reason and they are still underwater.
The problem with selecting who qualifies and who doesn’t is that the effects of the underwater borrower affects us all. If my neighbor strategically defaults, that screws me. It doesn’t matter if he was an investor or out of work little ole lady.
The free market would be nice, but we really don’t have a free market.
The only problem is that when you allow people to refinance who wouldn’t normally be allowed to you essentially transfer wealth from lenders to borrowers. As an owner of mortgage REITs I don’t like that.