Dan Melson: October 2011 Archives

Irony abounds. Obama hyping a program formulated by the Bush Administration (that didn't see actual implementation until April 2009 due to legal delays) as a centerpiece of his reasons for re-election - long after the program has helped most of those it's going to. Via the Official Release from the government.

Details are very sketchy - the only changes I can spot are 1) it extends the current program through 2013, and an apparent removal of loan to value limits altogether. As I wrote here when first describing this program,

there are potentially issues with loan subordination. Lots of folks got a first mortgage for 80% of the value of their home through Fannie or Freddie, with a balance of up to 20% of the value on the property through a second mortgage. Alternatively, if they did put the full twenty percent down, they got an equity loan in order to take cash out at some later time. If you have a second mortgage and refinance your current first, the second mortgage automatically slides up to first secured position, and your new loan would take second place. That's not acceptable to Fannie or Freddie, and for good reason. So if you do have a second mortgage, the holder of that second mortgage must to agree to subordinate to your new loan in order to be acceptable to Fannie or Freddie. Fannie and Freddie are not allowed to pay off second mortgages under these programs - that's not a risk they have currently taken; they're not going to throw even more money at the program and take more risk. As I said, this isn't charity, this is loss mitigation. Some second mortgage holders may not agree to subordinate. There is nothing that can be done to force them. All you can do is explain why it is in their best interest and hope they see reason. Some second mortgage holders may demand conditions upon their subordination and you must satisfy those conditions to get them to agree to subordinate. One condition that I would expect to get is that the balance on the first mortgage not increase, which means you have to pay closing costs out of pocket if you do have a second mortgage - no rolling them into the balance of your new mortgage.

Why isn't this going to help a lot of people, you may ask? While relaxing loan to value ratio requirements is good for those who may have seen values drop 60% (e.g. condo owners around here, thanks to imposing some odious loan restrictions of dubious legality (and even more dubious morality, as well as completely devoid of any claim to brain activity)), all of the other requirements for every other loan out there still have to be met. This loan program has existed for over two years with a limit to the first loan amount of 125% of the value of the property. This means that if you bought with an 80% first, whether or not there was a subordinate loan (the preferred method of dealing with down payments of less than 20%, as the increased interest was and is preferable to paying PMI), your value had to have already fallen by basically 40%, which even around here does not describe most single family residences.

Furthermore, the stumbling blocks that prevented most people who wanted to from taking advantage of this program are still there, exactly the same. First off the loan had to be sold to Fannie or Freddie on or before May 31, 2009. This doesn't consider that most of those who are going to lose their home through being unable to refinance have probably already lost their homes in those 2.5 years or more. This doesn't help any more recent purchasers who have also seen values decline. Second, subordinate loans. These won't agree to become even further underwater, so if the people who want to refinance don't have the money to pay costs out of pocket, subordination isn't going to happen. It didn't happen the last two years because second mortgage holders wouldn't sign off on them, and that's not going to change now. Mr. Obama talks about lowering costs of refinance, under this program but I'm not seeing anything about that in the official press release. No waiver of any requirements. How exactly, does he expect the closing costs of the refinance to go down?

Finally, there's the big hurdle of debt to income ratio. If you originally qualified
using stated income, you're basically out of luck. I never saw or heard of a stated income application that didn't have a false representation, as if you actually could document making that much money, you could have gotten better rates of a full documentation loan. That's what they mean by "the original application can have contained no misrepresentations or fraud". As to documenting your income now, a few can and they have mostly already refinanced. If your income has declined, or if you or your co-borrower is out of work (or has been for a significant period in the last 2 years), it's unlikely you'll qualify.

I'm all for helping folks, For every single person this expansion helps, I'm genuinely glad for you. I just don't think it's going to help many people, because almost all of those folks this program could productively reach have already taken advantage of it. If Mr. Obama (or Congress) really wants to fix the mortgage market, I've written about some small low cost ways that would make an immense difference.

Caveat Emptor