No Bailout For You

http://www.forbes.com/2009/03/04/obama-plan-mortgage-business-washington_mortgage.html

Business In The Beltway
No Bailout For You
Joshua Zumbrun and Maurna Desmond
03.04.09

Who's not eligible for a new mortgage under Obama's modification and refinancing plan.

WASHINGTON, D.C.--The Obama administration released more details Wednesday on its $275 billion foreclosure prevention plan. The administration hopes 9 million homeowners will have the opportunity to refinance or modify their mortgages, helping to dam the flood of foreclosures currently drowning real estate markets.

But there are 112 million households in the U.S. What about the other 103 million?

For most of those people, the modification plan has only indirect benefits: fewer foreclosures in their towns and, if all goes well, stabilizing housing markets. Those are hardly trivial benefits, but some taxpayers might feel sore about footing the bill for everybody else.

A look at who's left out:

Jumbo mortgage holders: Anyone with a mortgage on a single-family residence over $729,750 is ineligible for modification. In most parts of the country, $729,750 will buy you a huge house, but back in 2007 it was the median home price in places like San Francisco and San Jose, Calif.

Investors and speculators: Remember when it seemed like a great idea to buy and flip as many homes as possible? Oops. The foreclosure prevention programs are only for owner-occupied homes, as verified by a tax return, credit report and other documentation such as a utility bill.

Some people were, no doubt, essentially speculating on their primary residence, hoping to flip the home they lived in. These people would be eligible for these programs. People who bought multiple-unit condos and currently live in one of the units are eligible too. But by and large, investors, speculators and vacationers will be unable to come up with documentation proving the home is owner-occupied.

People who can't document their income: Borrowers who took out so-called "liar loans" are going to have trouble fibbing their way through this round of underwriting. The government is requiring servicers to run a credit check and verify income before modifying loans. This means that a dog walker who bought a McMansion during the bubble will have a much harder time proving he or she can afford a discounted mortgage now.

Renters: Obviously, a mortgage modification plan wouldn't help people without mortgages. Still, the more than 37 million households in the U.S. that rent (some of whom were priced out of owning a home during the bubble) can't be too happy about subsidizing belly-up borrowers. Renters looking to own their own homes have a particularly difficult pill to swallow: The plan is aimed at stopping home prices from correcting to affordable levels, pricing out many would-be buyers. Obama's stimulus plan does, however, have an $8,000 first-time home buyer tax credit.

But imagine the plight of renters who live in a four-unit condo they share with their landlord. The landlord is eligible for a modification (for four-unit properties, the cap is $1.4 million), potentially saving thousands a month, but he's under no obligation to reduce the rent for his tenants.

Recent borrowers without Fannie Mae and Freddie Mac loans: The biggest part of the government's plan allows people with Fannie Mae or Freddie Mac mortgages to refinance to a better rate, even if their mortgage is as much as 5% underwater--for example, if you owed $105,000 but your house was only worth $100,000. Under the old rules, a homeowner needed 20% equity to refinance. Thus, many recent buyers who have seen their homes lose value have been unable to refinance at today's low rates.

The government is quick to point out that this program is for responsible home buyers who haven't missed payments. OK, but what about responsible buyers who haven't missed payments but have little or slightly negative home equity and just happen not to have a Fannie or Freddie loan? Tough luck.

Holders of older mortgages: If you bought your house years ago and have been quietly paying your mortgage on time ever since, there's nothing here for you. Even the government's efforts to keep mortgage rates low are possibly of little benefit to these homeowners, many of whom refinanced into similarly low rates in 2003 and 2004. People with great credit scores who already have a large stake of equity in their homes can refinance under conventional programs.

Second-mortgage holders: Many borrowers might still be in trouble if they took out second mortgages (they were usually called home equity loans at the time--something of a misnomer as most of that equity from the boom years is gone now). But there's no modification plan for people in trouble on second mortgages unless they're also eligible for modification with their first mortgage.

For second-mortgage holders also in trouble on their first mortgage, the Treasury says it will eventually unveil some incentives to extinguish that second mortgage.