Monday, August 04, 2008

What Isn't Wrong With Hope for Homeowners

by Tanta on 8/04/2008 08:38:00 AM

Via L.A. Land, we are offered this "convincing" criticism of the new housing bill's FHA program, known far and wide (or at least in the text of the bill) as "Hope for Homeowners," by mortgage broker Lou Barnes:

The new housing assistance bill, dismissed here briefly last week, deserves a more thorough hatchet-job.

It’s centerpiece is a $300-billion FHA loan guarantee (not money) to refinance under-water home “owners.” Consider a Bubble-Zone victim who bought a $200,000 home five years ago, made a 5% down payment and got a 5-year interest-only ARM for $190,000. The home has fallen 25% in value to $150,000. She has made interest-only payments since, and her $190,000 loan is entering amortization reset.

Her rate is not bad, 5.50% even after adjustment. However, her payment will jump from $871 to a killing $1,167. To her rescue, the bill’s “Hope for Homeowners.” In the land of unfortunate acronyms, gotta call it HoHo.

HoHo provides for a write-down of the mortgage to 90% of current market value, to $135,000, plus a 3% refinance fee to the FHA, $139,000 total. HoHo further provides a 1.5% annual surcharge; added to 6.50% current market equals 8%, amortized for 30 years is $1,020 per month. Better by a little, possibly affordable, equity negligible, pride failing. Then there’s HoHo’s anti-equity kicker: when the place appreciates in value (how many years ahead?), and she either refinances off the 8% or sells, HoHo will take half of any appreciation. I bet HoHo won’t split costs.

While she considers HoHo humiliation, a new renter moves into the house next door, identical, rent $700. Millions of people just like her are now condemned as “Walkaways.” Professionals, fiddle with local examples; I think this one is mainstream.
First of all, I really need to know how many "Bubble-Zones" there are in which prices have fallen 25% from 2003 levels. Let's just pretend the Bubble Zone in question is LA. According to Case-Schiller, "low-end" prices have fallen 36.5% from their peak, which appears to have been about Q3 2006. But even this current price is more than the CS price level as of mid-2003. If you want to talk about "mainstream" examples, I suspect that your "mainstream" 2003 buyer who never refinanced is still above water in most places.

Why would anyone pick a 2003 borrower who actually made a downpayment to make this case? I dunno. Why would anyone be so obsessed with "pride" and "humiliation" in this context? I dunno. A homeowner who cannot carry the monthly mortgage payment unless it's at 2003-era ARM start rates with interest only is a homebuyer with a problem, regardless of current property value. Possibly such a borrower might work something out with her servicer to extend the IO period or something. Possibly such a borrower should just sell now at break-even or better (at least in nominal terms) instead of "walking away" and trashing her credit rating. I dunno. But I also dunno why anyone would think the fact that such a borrower is an implausible candidate for the Hope for Homeowners program is a valid criticism of Hope for Homeowners. HoHum.