February 25, 2009

Breaking Down the Housing Bailout

It really isn't a bail out you know it is the "Homeowner Affordability and Stability Plan". But hell whats in a name. I have to admit I haven't gotten much past page one of this gem simply because I'm afraid that my head will explode. For those of you who are interested, and besides Mr. Santelli's rant the other day I don't think too many people are here is part 1.

*Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes
have a difficult time refinancing. Yet millions of responsible homeowners who
put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to access these lower rates. As a result, the Obama Administration is announcing a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.

*Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.

This hypothetical family have unfortunately put $53000 down a home and in the present downturn have seen 39K of their cash vanish. That's unfortunate, but they are not upside down on their loan. They are still making the payments and they can either sell the home and eat the loss or they can do the responsible thing and continue to make the payments and hope the price recovers. And lets face it historically 6.5% anit half bad.

I remember asking my father when I bought my first home if he had any advice. His response was that perhaps I should ask someone else because he lost money on every property he ever owned. I have to say I have done only slightly better than my dad but someone needs to explain why our hypothetical family deserves my money in this situation. They are not loosing their home they are loosing their equity. Sorry but economics happens and its not my responsibility to make them whole.

From Time Magazine: I Bought an Expensive House. My Bad, Not Yours: Read the whole thing.
The only people affected by plummeting real estate prices are the ones who bought a house that cost more than they could afford, hoping for a spike in value so they could sell at a profit or take out a new loan based on an increased value. Their home wasn't just a place to live; it was an investment they thought they could liquefy at will. If we're saving these poor souls from the 26.7% drop in their investment, we should give twice as much aid to everyone who has lost approximately 50% in the stock market since its peak. Especially those in Vanguard's Tax-Managed Capital Appreciation Fund.

No comments: