Wednesday, November 12, 2008

Mortgage Bailout Plan Is The Government Version of Predatory Lending

The mortgage bailout plan unveiled yesterday, designed to "help" homeowners in financial difficulty stay in their homes, is a perfect example why we should board up the windows and barricade the doors whenever the government attempts to come to our rescue.

What has been proposed is little more than a government version of predatory lending. Here are the basics as I understand them. Homeowners who are delinquent on the mortgages and have no equity in their homes can get a loan modification whereby the rate would be adjusted to 3% and the total housing payment for the homeowner would not be more than 38% of the monthly income. All this is based on a 40 year amortization schedule. So good so far.

Now here is the bad (predatory) part. Nothing is being done to change the mortgage balance. Let's say you bought the house for $300,000 and the mortgage was $280,000 and now the house is worth $200,000. That means your have negative equity in the home of $80,000. Let's also assume that the rate adjustment with the payment limit would equate to a $180,000 mortgage. If you stayed in the home for forty years, which is unlikely but possible, you would still owe the lender $100,000 at the end of the mortgage.

If you sold the house, which is more likely, you would have to pay off the full mortgage amount of $280,000. Since the average family moves every 7 years, what are the chances that the prices will stop falling and then appreciate enough to get the value back to around $300,000 before you move? Not likely.

The government thinks this workable based on the notion that housing prices inevitably go up. Isn't this the same assumption that got us into this mess in the first place? This program will do little more than postpone the day of reckoning that troubled homeowners are currently facing. It is very unlikely to solve their problems. Isn't it ironic that we listen to our elected officials to rail against the predatory mortgage companies, yet feel it is OK to offer the same kind of garbage in the name of "assistance"?

As a real estate broker, I want to see the market improve ASAP. I wish this sounded like a solution, but it doesn't. It sounds like another reason why government intrusion into the private sector is likely to make a bad situation even worse.

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