Mortgage bailout plans: options as they stand, today
It’s as good a time as any to outline several of the government’s proposed “bailout” plans. (Proposals followed by my own comments, of course.)
* The Federal Deposit Insurance Corp. (FDIC) proposes spending $24 billion of the $700 billion bailout funds to help 1.5 million households avert foreclosure.
The FDIC would guarantee 2.2 million modified loans, mostly loans made to borrowers with weak credit or small down payments. Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable. Monthly payments wouldn’t total more than 31 percent of home owners’ pretax monthly income. Taxpayers will absorb half of the loss if a borrower defaults. Loan servicing companies will be paid $1,000 for each loan they modify.
PROBLEM: Guaranteeing 2.2 million loans “mostly made to borrowers with weak credit or small down payments” might not make a lot of sense. These loans may be the least-likely to ever be paid-off; borrowers have little invested, and they (meaning, “us”) may be better off taking one for the team. The goal of the FDIC may not be keeping people in their homes as much as it is stretching out the period before borrowers’ defaults. Fewer defaults today means quicker recovery for the market, perhaps allowing more people, later, to refinance or sell for what they owe.
- Source: Alan Zibel, Associated Press
* The National Association of Home Builders (NAHB) wants the government to offer home buyer tax credits and low (2.99% until mid-2009; 3.99 for the remainder of next year) home loan interest rates to encourage more people to buy homes.
PROBLEM: This is not so much a “bailout” proposal as it is one to get more people to buy homes (and, by extension, get more “Home Builders” back on the job. While the tax credits and low interest rates sound appealing, it’s my opinion that people will re-enter the market once we have stability and that no incentives are needed. I mean, c’mon, you already get to deduct all your loan interest, what other incentive do you need? Plus, rates are at 6% - after inflation, you’re practically minting money.
- Source: Kenneth Harney, Washington Post
* The National Association of Realtors (NAR) wants the government to cut purchase-mortgage rates 1 percent or more below current levels.
The NAR also wants an improved home-purchase tax credit, and wants a temporary move hiking limits on “conforming” mortgages to as much as $729,750 made permanent. (Those limits, authorized by Congress in February, are set to expire on Dec. 31.)
PROBLEM: I don’t know how much effect the higher conforming loan rates have had on the market. While lower rates for more-expensive homes sounds appealing, I’m not sure the difference in loan rates would keep anyone from buying, right now. Again, people are looking for stability.
- Source: Kenneth Harney, Washington Post
* Have the government buy all the troubled loans and issue new loans. This is the McCain plan, proposed prior to the presidential election. Barney Frank is in on this one, too.
PROBLEM: From the sounds of this, it sounds like more “socialism”. Government owning your loans - outright? Yikes. As a cynic might say, “They do so well at everything else, I’m sure they’d do great as loan servicers of $300 billion in debt.”
* Have the loans rewritten at lower valuations, in effect, forgiving some of the borrowers’ debt. But, if the value of the borrowers’ homes increase, the lenders get to share in the appreciation of the property, and get a cut of the sales proceeds.
PROBLEM: Sounds hokey, and hard to manage.
- Source: Jenifer McKim, Boston Globe
(Of course, there’s also “Plan F” which is: do nothing and hope for the best.)
UPDATE: On first glance, the proposals to lower the interest rates on loans seem illogical. However, upon reflection, they might have some merit.
I think it’s as much a problem with how it’s being sold as an idea as it is the idea itself.
What the government would do is, in effect, “buy-down” the loans’ rates. As Kenneth Harney explains it:
Say 30-year fixed mortgage rates are around 6.5 percent.
You can pay a bank a one-time fee to “buy” a lower rate.
Although the cost to do so varies from bank to bank, lenders generally charge 4 percent of the loan’s principal to cut the interest rate by 1 percentage point. On a $200,000 mortgage, that works out to $8,000.
In both the builders’ and Realtors’ proposals, the U.S. government would pay such buy-down fees.
It ain’t cheap, however. Estimates are that it would cost $130 - $140 billion.
The advantage is, existing homeowners / borrowers get the benefits of lower interest rates, meaning, lower monthly payments, while not doing hokey things like messing with the free market as much (interest rates on new loans would be set by banks, not the government).
Bottom line, unfortunately, is that many people are out of luck, and they’re going to lose their homes, regardless. The sooner they’re out, the better.
The proposals that use words such as “forgiving debt” are dead in the water, in my opinion. To the average American (those who own and those who don’t), the idea that others are “getting something for free” is tough to swallow. Lowering their interest rates or extending lengths of loans might be more palatable, if only because it makes the unfortunate borrowers have to be stuck with their poor decisions.
- Photo courtesy HUD.gov