Saturday, March 14, 2009

The Obama Easy Payment Plan for Irresponsible Homebuyers

The Homeowner Affordability and Stability Plan

On February 18, President Obama announced a $75 million comprehensive plan to help homeowners avoid foreclosure by providing affordable and sustainable mortgage loans. The Homeowner Affordability and Stability Plan has two parts major parts but also contains other minor provisions. One part of this program one may have heard about, the judicial modification as part of a bankruptcy, is not achieved by this act but is simply proposed. Here is what is in the plan.

The first major part of the program provides for a sweeping loan modification program targeted at borrowers who are at risk of foreclosure because their incomes are not sufficient to make their mortgage payments. Some 3 to 4 million homeowners will be helped under this program.

The second part of the program provides refinance opportunities for borrowers who are current on their mortgage payments but have been unable to refinance because their homes have decreased in value. They may now have the opportunity to refinance into a 30 year, fixed rate loans. Fannie Mae and Freddie Mac will allow the refinance of mortgage loans that they hold in their portfolios or that they guarantee in their own mortgage-backed securities. Four to five million people will be helped under this program.

Here are the major components of the Loan modification provision of this program.

  • A Shared Effort: If the lender will lower the payment so that the mortgage payment does not exceed 38% or the borrower’s income, then the treasury will match the reductions dollar for dollar down to 31% of the borrower’s income. The interest rate reduction necessary to reach this lower ratio would stay in place for five years then would be stepped back up to the conforming loan rate in place at the time of the modification. Subsidies could bring the interest rate as low as 2%.
  • Incentive to servicers: For each loan so modified the servicer will be paid $1000 up front and up to $1000 a each year in “pay for success” fees.
  • Incentives for Borrowers: As long as the borrower stays current the borrower will get $1000 a year for up to five years.
  • Reach Borrower early: To encourage servicers to help at-risk borrowers before they go into default, an additional fee will be paid servicers and mortgage holders for loans they modify.
  • Home Price Decline Reserve Payments: This is an insurance fund to grantee loans so that lenders will be willing to modify more loans in areas where house values are declining.

Here are the major components of the refinance provision of the program.

  • Conforming loans. The loans had to be good loans to start with.
  • Standard underwriting. The borrower must meet standard credit standards
  • Higher Loan to value. The new loan can be up to 105% of the homes value.


I do not like this plan. It may work. It may stabilize housing, but it is wrong. We could have done better. I do not have much of a problem with the refinance provision of this act but do not like the loan modification provision. Something had to be done however to slow the rate of foreclosures.

If the house next door to you goes into foreclosures your home value can drop. If several houses on your street go into foreclosure your homes value can drop considerably. Your wealth can be eaten up through no fault of your own. If you need to sell your home, you may have to sell it for considerably less than what you think it is worth. There is a social cost to other people’s foreclosures and we must do something. As long as existing homes are dropping in value lenders are going to be reluctant to ease up on credit and allow even deserving borrower to finance homes. This crisis stated in the housing sector and I do not think we can pull out of the economic crisis until we stabilize the housing market. Nevertheless, I don’t like this plan. We needed to so something else other than what we have been doing, but I think this is the wrong thing to do.

Rather than just give the money away, I would have preferred a plan that placed a second or third mortgage on the home of the borrower that got the assistance. We could have designed a program that made a loan to the borrower in order to “buy-down” the first mortgage. This loan could be a “due on sale” loan so the borrower would not have to pay the loan back as long as they lived in the house. If the home value never increases then the tax payers would still be out, but if home values stabilize and then increase the taxpayer subsidy would be paid back and the irresponsible lender and borrower would not realize a profit due to the government rescue.

Another possible way the bailout of irresponsible lenders and borrowers could have occurred is a “shared equity” loan designed so that if and when property values again accelerate the government recoups any subsidy but in a way that is proportional to the increase in equity. We needed to so something and I could have designed better ways to do it.

Perhaps the simplest way to achieve the desired effect of slowing the foreclosure rate but not enriching the irresponsible is to simply encourage mortgage companies to modify the loans by changing the amortization period to forty years or fifty years or however long it takes to make the payments affordable. The loans could still be 30 years loans but with a balloon at the end of 30 years. The homeowners who benefited by buying housing they cannot afford would still get to live in the houses they should never have purchased in the first place, they simply would not benefit by pocketing the equity and sticking it to the taxpayers.

One thing I do not like about the loan modification provision of this program is that it only helps the irresponsible. I see responsible people who are losing their home every day due to the loss of a job. I would have preferred that some of those people to whom bad things happen be helped and fewer of those who simply bought more house than they can afford. The economic impact would be the same weather we help a person who is facing foreclosure because a spouse died or because they bought too much house. This package does nothing to help the deserving borrower.

One of the most objectionable aspects of this program is paying people $1000 a year for simply making their new lower mortgage payments on time. This is an outrage. All of those people who didn’t buy more house than they should have bought, and who were smart cautious borrowers and who got good loans are not going to be rewarded for paying their house payment on time; the irresponsible will be. If you are a responsible person in today’s world you are a fool. I guess rewarding the irresponsible is the kind of change people voted for in November.

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Thursday, March 12, 2009

Does Rush Define What Conservatives Stand For?

Reason Online – In attacking Rush Limbaugh, American Enterprise Institute Fellow David Frum risked incurring the ire of the conservative movement. But in doing so, did Frum open up the door to questions about the soul of the conservative movement, and what it now stands for after two electoral failures? [read article here]

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Wednesday, March 11, 2009

Is Rush Limbaugh Good for the Conservative Movement?

I was conflicted as I watched Rush Limbaugh address the CPAC convention. There were times when he got my adrenalin pumping and I wanted to stand and cheer. There was much in his speech with which I agreed. Then, his attack on John McCain and, without naming them by name, George Will, David Brooks and Charles Krauthammer brought me back to reality.

I suspect that if William F. Buckley, Jr. were alive today that Rush would denounce him and read him out of the conservative movement also. Buckley was the person most responsible for defining post World War II conservatism until Rush Limbaugh redefined it. Buckley and those around him like Russell Kirk. James Burnham, Frank Meyer, Willmoore Kendall, L. Brent Bozell, and Whittaker Chambers were educated men and political theorist. They not only opposed something; they also stood for something. They made reasoned arguments. They challenged people to think.

Today we have Rush Limbaugh, Sean Hannity, Michael Savage and Ann Coulter as leaders of the movement and their stock in trade is to insult, belittle, and rant. They don’t appeal to people’s reason but to their emotions. You don’t have to exercise your intellect to enjoy Rush Limbaugh. Much of the Limbaugh appeal is an appeal to class envy. He excels at pitting the beer and pretzel crowd against the wine and brie crowd. That is not ideology but class warfare. It should be beneath us. Limbaugh and Hannity even brag about the fact they do not have a college education as if too much education will corrupt you.

If we accept Limbaugh as the leader of the conservative movement, I fear we will become the movement of the peasants with pitchforks. We will become the movement of the stupid. We will have an angry and motivated but shirking base. I do not want to overstate my case against Limbaugh. I was once a fan. He made people unashamed to be conservative. He poked fun at liberal pretensions and I enjoyed it. He can be cleaver and entertaining. However, enough is enough already. He is the conservative’s equivalent of the liberal’s Michael Moore or Al Franken. He is preaching to the choir. He is rousing the rabble. The conservative movement does not need more Limbaugh; we need another William F. Buckley.

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Monday, March 09, 2009

Are CRA, Clinton and Carter Really to Blame?

by Harold Black

I am fed up with the conservative talk show hosts putting the blame of the current economic crisis on the Community Reinvestment Act. I’ve heard them say that the CRA was signed into law by Jimmy Carter and aggressively expanded under Bill Clinton forcing banks to make loans to people who could not afford them. Fannie Mae and Freddie Mac were also forced to buy these loans. Since people could not afford them, they defaulted causing the failure of Fannnie and Freddie and precipitating the crisis.

As my father used to tell me, “Harold, that sounds good if you are interested in sounds”. But what is the truth? The truth is that republican presidents rather than democrats were ultimately responsible. When I was Deputy Director of Economic Research at the Comptroller of the Currency, the Congress passed the Equal Credit Opportunity Act in 1974 and the Home Mortgage Disclosure Act in 1975. I was charged with determining if national banks (those who received their charter from the federal government) were guilty of discrimination and of redlining. Discrimination is the act of denying a person a loan based on a prohibited basis such as race. Redlining is the denying a loan to anyone regardless of race who is applying for a loan in a specific geographical area.

My study (published in the American Economic Review, "Discrimination in Mortgage Lending," (with R. L. Schweitzer and L. Mandell), May 1978, v. 68, n. 2, pp. 186-192) showed weak statistical evidence of racial discrimination in the accept/reject decision but no evidence of redlining. These acts and our research at the OCC laid the foundation for other research on discrimination and to the passage of the CRA in 1977.

Although the CRA was signed into law by Jimmy Carter, two other important acts the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA) were signed by a republican, Gerald Ford. The talk show hosts also state that Bill Clinton was responsive for the expansion of CRA and forcing the banks to make bad loans. However, the two major changes in the CRA occurred in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. Both were signed into law by George H. W. Bush. Under FIRREA, the reporting requirements of CRA compliance were expanded. The latter act required Fannie Mae and Freddie Mac to support affordable housing by purchasing CRA-qualifying loans. Even though the talk show hosts have said that up to one half of Fannie and Freddie loans were CRA loans, the act suggests that by the year 2010, that one-third of their purchases be affordable housing loans.

If there were pressures to expand CRA lending, it came in part from the banks themselves. As a result of the Riegel-Neal Interstate Banking and Branching Act of 1994, signed into law by George W. Bush, CRA ratings became an important factor in determining if banks could merge or acquire across state lines. Because advocacy groups would use CRA ratings as a protest against the banks in order to get additional CRA lending, the banks greatly expanded these types of loans. I recall going to a Fed Atlanta conference on CRA lending, compliance and enforcement. A banker told me that the Feds never pressured him into making a bad loan. However, because they wanted to expand into other states, they had instituted a more liberal CRA lending policy. So the truth is that if there is blame to be handed out for a misguided CRA policy, it has to be laid at the feet of the republicans and the banks. Jimmy Carter and Bill Clinton are convenient whipping boys and are well deserving of other blame but CRA lending is not one of them.

As to the banks making loans to people who could not pay them back? We in Finance have a technical term for such lenders – it is a fool. This makes no sense at all. Some people will say that the bankers could make bad loans because they would be sold to Fannie Mae and Freddie Mac. Well most CRA mortgages and subprime mortgages were sold to private investors. If these loans defaulted within 90 days, then the purchasers would put them back to the originator, If they defaulted later and more bad loans were made by the originator, then the investors would either not buy them or would offer low prices on mortgage pools of the originator. Either way, the originator would lose and would quit making bad loans.

Lastly, there are too few subprime mortgage to have caused the financial crisis. At year end 2008, there were $1.3 trillion in subprime mortgages. The default rate on subprimes had increased from 8 percent to around 20 percent. If you assume 100 percent loss on the defaulted mortgages, then this totals $260 billion. Well in 2008 the total loss in mortgage backed securities was $435 billion. If subprime defaults were at fault, then there would have been no need for the $800 TARP package. So like Carter and Clinton, subprime is just a convenient whipping boy. As my readers know, I am a laissez-faire free market conservative. But that does not blind me to the truth.

Harold A. Black is the James F. Smith, Jr. Professor of Finance, University of Tennessee, Knoxville. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. Dr. Black blogs at Caveat Emptor where he originally published this article. It is reprinted on this blog with his permission.

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Sunday, March 08, 2009

My Life Without Me

My Life without me, movie It takes an illness with a bleak prognosis to break open 23-year-old Anne's (Sarah Polley) longing for a better life. A mother of two stuck in a dead-end job, Anne has received nothing but grief from her troubled parents and her slacker husband (Scott Speedman). But when she finds out she's dying, she makes a list of things she wants to accomplish: get acrylic nails, sleep with another man and, best of all, realize her true potential.

Starring: Sarah Polley, Scott Speedman
Director: Isabel Coixet
Genre: Drama
Format: Widescreen ...
Language: English
Rated R: For language

My Review
I watched this movie this weekend and loved it. I know people like the girl in this movie; people whose life is a mess. She is so typical of many of the clients I serve in my job; people who have made a lot of mistakes and have very little future but muddle through life and are doing the best they can given their circumstances.

If you are feeling a little depressed don't watch this movie. This movie is so sad. It will make a grown man choke back a tear. It will make you get introspective. About the time it gets so sad you think you can't stand it, something funny will happen that relieves the tension and makes you laugh out loud. A great movie!

If you have Comcast it is now showing as a free movie.

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