President Obama is stumping for changes to the HARP program -- and while I try to stay politically neutral here, I reserve the right to call out idiocy anywhere I see it. (and yes, idiocy may be a stronger word than is called for - but wasting political capital slightly modifying a program that is very weak and doesn't address some fundamental issues, is not exactly smart)
http://www.marketwatch.com/story/mortgage-refi-plan-targets-hard-hit-borrowers-2011-10-24?siteid=nwhpf
"To spark interest in HARP, the program will lower fees, eliminate the current 125% loan-to-value ceiling, waive lender warranties and eliminate the need for property appraisals. "
Gee, make it easier for bad credit risks to refinance? Here's my take.
Yes, something needs to be done. But allowing people who fundamentally are screwed *anyway* to get out of their loans (which includes forgiveness of some principal) shifts the burden unfairly to the bank-stock shareholders. If you are underwater on a mortgage, it is not necessarily an emergency. Absent plans to move, all it takes is some time to change the situation. The wholesale granting of "liar's loans" a few years ago was obviously a stupid things for banks to do; I am NOT excusing them. But folks who enter a mortgage need to realize that a secured loan is exactly that - and the house IS the security. You pledge to pay $250,000, and fail to pay it back - you don't get to keep the house. No one questions the repossession of a car after failing to pay a $20,000 car loan!
So it is all well and good to question this kind of program - but what do I propose instead?
First, only allowing a program that is guaranteed by FreddieMac or FannieMae does not help the 70% of homeowners who have a mortgage through another institution. Secondly, principal should not be forgiven. Third, credit issues still need to be resolved. Here's my proposal.
Allow a two-year period where refinances can be done with the following waivers:
* Any amount can be refinanced, up to the current loan amount.
This only makes sense. If the bank is on the hook for $400,000, then they by definition cannot be hurt by allowing a refinance of $400,000. By allowing the refi, they increase their chances of getting repaid AND make more in interest charges the next few years!
* Modify the appraisal process.
This is basically a correlary of the above point. We don't care about what the home is worth; we just want to make sure it is structurally sound.
* Credit still needs to be checked. Income verification needs to be revamped.
We do want to make sure that the loans made can still be repaid. If a household is bringing in $5,000 a month, is there any doubt that a $2,000 payment - 40% of their income!! - might be a stretch, still? If their P&I payment was $2,800 a month but an extra member of the household used to be working, their situation has changed enough that perhaps they shouldn't be owning a house anymore.
I guess I am angry that only a small percentage of homeowners may qualify under HARP and that the fix hurts shareholders who have already been nailed by the last few years of bank stocks' crumbling share prices.
Regards,
Trond Hildahl
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2 comments:
Hey Trond,
I have to question your analysis a little on this blog post, which I will itemize below:
1. You state that HARP will make it easier for bad credit risks to refinance but I don't think that is necessarily the case in that HARP will allow everyone who is underwater a better chance to refinance - whether or not they are creditworthy is dependent upon the institution that refinances them. It's not a given that the person using HARP is automatically a credit risk.
2. I submit that the banks should bear the loss burden as well as any shareholders dumb enough to invest in these horrible institutions that have essentially cheated the system via SIV's, and other off-balance sheet constructs. Whatever happened to underwriting practices? Most people are financially illiterate, but even those that aren't were prone to get caught up in the GO-GO, fast money folly of the housing boom. I blame the banks here more than the people because they are supposed to have standards that they ignored so they could make a fast buck.
3. Where do you get your numbers regarding Fannie and Freddie only holding 30% of mortgages? I was under the impression that most of the loans that were issued over the past few years were then sold to Fannie and Freddie on the secondary market. I would like to see what the actual number is because I'm pretty sure you are understating them.
Overall, I think that this program will help in more ways than you think because we need to alleviate the debt burden on the middle class since they are the engine for the economy. Bernanke has already tried top down monetary policy by flooding the banks with cheap money, but that hasn't trickled down to main stream because we are in a liquidity trap, and because trickle down economic policies have historically never really worked.
While HARP may not be as effective as the Resolution Trust Corp was in the 80's, it is the best real attempt at helping those who have received very little to date. Also, it's probably the only real way of re-enacting the RTC since the original version wouldn't be politically feasible at this time given the ineptitude of the current Congress.
Trond,
Personally, I think most Americans have little financial sense. In this era of "Me, me, me" and "Why put off tomorrow what you can have today" has made people ignorant of how much they actually pay.
For the mortgage problem, the only thing the banks really need to do is simply allow them to refinance into a 40-50 year mortgage. Honestly, no interest rate adjustment necessary and no principal adjustments necessary. Heck, you could probably even raise interest rates by as much as 1% as long as people could afford the payments.
Most people in this country have no sense that you should try to pay off the mortgage and accumulate equity. I believe the majority of people only think of what will happen next month or next week. As long as a house can survive 40-50 years this shouldn't be a problem.
This is the same type of thinking that went on when auto dealers started offering 72 months and 84 month financing.
People in this country have no problem living in debt, as long as they can make the payments.
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