True case study as foreclosure cessation begins

With the passage of the ARRA 2009 and all the financial chaos that will ensue, BHO now turns his attention toward wrecking the home mortgage market as well.

 

Why do I say this? BHO is proposing a government bail-out of "negative-equity homeowners" or people who overpaid for their homes and now owe more than their homes are worth. Now this sounds very compassionate, very magnanimous, very liberal by its intentions; however, by now you are aware that every time the government involves itself in the private sector there are LOUC (law of unintentional consequences) to pay.

 

What will the LOUC be in this seemingly "good intentioned" concept of helping those with homes on the brink of foreclosure? To accomplish this let's virtualize our perspective by going to an imaginary neighborhood in any suburban area say in Florida, Texas Gulf coast, or California. There are 3 homes in a cluster in a very quiet cul-de-sac; all the homes are similar is size, style, and value. The differences start when the houses were last put on the market and purchased by the Jones, the Smiths, and the Browns. All three homes have mortgages, but with different terms and current balances. Let's detail...

 

The Jones purchased their home for $205,000 with 10% down when the sub-division first opened for sale over 10 years ago. Ed Jones, an civil engineer, his wife Jill, and 3 children have lived in this home watching the neighborhood grow, change, and increase in value. Their mortgage is now going on 11 years for $180,000.00 balance at 7% fixed for 30 years. Ed's monthly payment is $1,800.00 including PITI.

 

The Smiths purchased their home 6 years ago with original terms of $250,000 with 5% down at 6.5% 30 fixed, but 3 years ago the Smiths refinanced their home for $250,000 on an ARM of 3.5% for 3 years, and then escalation of 1.5%/year maximum for 4 years with a cap of 9.5%. Tom Smith's current payment is now just moved to 5% for a monthly PITI of $2,000.00.

 

Finally, the Browns purchased their home 2 1/2 years ago on a teaser, interest-only rate of 3% on $300,000 and 0 down with a readjustment period to an ARM including PITI 3 years from origination beginning at 5% with an annual ramp-up of 1.5% to a maximum of 10%. George Brown's current monthly payment is $1,975.00 ITI, but will reset to $2,750.00 next month.

 

Here is the situation, the Brown's are now 2 months late on their mortgage since George sees he will not be able to make the new mortgage payment so he decided to let it go since all the houses have now lost almost 30% of their value and his house is now going NE (negative-equity). The Smith's home is at parity (home value worth mortgage), and the Jones' are happily making their mortgage payments after 10 years.

 

Obama steps in with his mortgage-support plan, and the following happens: the Smiths see that if they are 60 days late on their mortgage they will be eligible for assistance so they cancel the check they just sent to the mortgage processor so they are effectively 30 days late and get in under the wire. Now the Jones who have paid on their mortgage for 10 years are the lone current mortgagor and the only of the 3 to get nothing while his neighbors get assistance coming from Ed's taxes.

 

The final atrocity is that Ed Jones loses his job, and due to equity in his home, his mortgagee immediately begins foreclosure proceedings, but Ed is not eligible for government assistance since was current on his loan, is PE (positive-equity) profiled, and did not take out a "funny loan" on his house. Ed loses his house while the Smiths and Browns are bailed out with taxpayer monies, but the Browns are going to re-default in 12 months since they couldn't afford their homes anyway.

 

Sound like fantasy? This is a true case taken from a Columbus, Ohio bank records (names changed) that began about 6 months ago. The Jones who did what the system considered right and morale are the ones penalized while those that took advantage were rewarded with Ed's tax monies.

 

Only in America could this abomination occur. So what will be the LOUCs of BHO's foreclosure cessation/hiatus be?

 

1. A sharp increase in the number of foreclosures as "the Smith's get in under the wire."
2. Angry "Jones" as they fall outside the assistance envelope.
3. Delayed clearing of housing inventory as "the Browns" re-default 12 months later.
4. Recession lingers as the problem of markets clearing is prevented.

 

BHO is quickly moving towards becoming the new-FDR, not the new-JFK who cut taxes as history has shown. JFK cut marginal tax rates; he did not send out tax rebates to non-taxpaying voters.