As I said in my last post, it’s becoming quite clear why none of the government’s heavily-hyped foreclosure-prevention programs seem to work.
Most of the blame has to be laid at the feet of the banks and mortgage companies that made and service all of the deceptive, unaffordable loans that created the housing crisis.
The first reason is that lenders have refused to hire the number of people they need to rework the millions of bad loans they created.
The second reason is that a shocking number of the loans they made during the housing bubble were more reckless and irresponsible than anyone wants to admit.
Too many of the families seeking help aren’t in just a little bit of trouble.
They’re in a lot of trouble.
They don’t make nearly enough money to repay the huge sums they were allowed to borrow, and owe so much more than their homes are worth, that it’s is impossible for any program to save these deals.
Obama’s refinancing plan allows banks to loan up to 105% of the current market value of a property. In other words, a family can owe 5% more than their home is worth and still qualify for help.
Yet many of the families who want to take part aren’t just a little underwater on their mortgage. They owe 20%, 30% or even more than their homes are worth.
Obama’s mortgage modification plan encourages banks to reduce interest rates and extend payment terms to lower monthly payments to no more than 31% of the borrower’s gross income — a common measure of affordability.
Yet most families aren’t in trouble because they’re spending 35% or even 40% of their income on housing.
They’re in trouble because the payments on their adjustable-rate mortgage have increased so dramatically that it’s gobbling up half, or more than half, of their income.
It’s not uncommon for families making $50,000 or $60,000 a year to be carrying $300,000 or $400,000 in mortgage debt. That’s not a little more than they can reasonably afford. That’s two to three times what they can reasonably afford.
To make the payments low enough to save those homes, banks must not only be willing to slash the interest rate, but forgive some of the debt — an option they’ve repeatedly rejected.
So what happens?
Overworked loss mitigation departments push the hopeless applications aside to pursue more promising cases.
Angry homeowners don’t understand why their repeated phone calls aren’t returned and why the government program they heard so much about isn’t helping them save their home.
Or the bank offers a catch-up plan that just adds the missed payments back into the loan, increasing monthly mortgage payments the homeowner already can’t afford.
The lender then counts that loan as a “modified mortgage” even though the home is on its way to foreclosure just as surely as it was before.
Bottom line: Bush counted on far more cooperation from the industry than he ever got, and now Obama is headed down the same path. If the president can’t solve these two problems we’ll soon be adding his foreclosure-prevention program to Bush administration’s list of failures.