Differences in policy on mortgage crisis proposals
   * Observe a foreclosure moratorium of at least 90 days on subprime, owner-occupied homes. The moratorium will stop foreclosures until lenders and servicers have an opportunity to implement the freeze in mortgage rates. The moratorium will also give state and city organizations as well as community groups the necessary time to provide financial counseling to at-risk homeowners.
* Freeze the monthly rate on subprime adjustable rate mortgages, with the freeze lasting at least 5 years or until the mortgages have been converted into affordable, fixed-rate loans. After the moratorium, there should be a long freeze in rates on adjustable rate mortgages. The overwhelming majority of subprime mortgages have adjustable rates. The long rate freeze will give the housing market time to stabilize. It will give families an opportunity to rebuild equity in their homes. It also gives the mortgage industry time, and incentive, to convert mortgages that were designed to fail into loans that are actually affordable. The rate freeze and loan modification must be extended not only to borrowers who are current but to some who have fallen behind. After all, it is indisputable that brokers and mortgage companies lured families into mortgages that were designed to end in foreclosure. This was only possible because regulators were asleep at the switch. A rate freeze is critical. An average of $30 billion in loans will reset monthly next year. One study indicates that the average reset increases monthly payments by 40%. It is no surprise that rate-resets are the major driver of the foreclosure crisis.
* Provide status reports on the number of mortgages being modified. Resolution of the foreclosure crisis will require that large numbers of unworkable mortgages be converted to stable loans. To date, however, despite pressure from Congress and the press, lenders and servicers have modified only about 1% of subprime mortgages. This obviously has to change. We cannot take the industry at its words that it will follow through on an agreement to convert loans expeditiously. Accordingly, the agreement must impose on lenders and servicers an obligation to regularly report their loan modifications.
My analysis:
Investors will loose in a huge way, they were depending upon contracts and a fairly well known, and low risk return. Now, their return will be quite limited, and likely, unless banking becomes nationalized, banks will no longer be favorable investments, and may fail. Thus precipitating a greater spiral, with potential global ramifications.
Homeowners with arms and other marginal mortgages get 5 years, to either sell, or refinance. However, with the banking industry unable to secure investment, will funds even be available to do so…. and if credit is tightened even further, real estate valuation will likely spiral downward. In fact, it could be a much needed correction. Sadly though, should anyone ever need to sell, or depend on their real estates valuation, they will loose big time.
Existing homeowners will see their real estate valuation crash. Not so much an issue if they have a steady income, and were not depending upon their home as a short term investment. Although, having their neighbors paying a much smaller monthly mortgage for an equally valued house will stick in the craw of some.
Real estate investors get bailed out, and this gives them time to re-evaluate their options. However, as real estate declines, so will rental rates, thus their cash flow will drop. At some point, even with low interest rates, they will be forced into foreclosure.
As real estate value declines, so do property taxes in a huge way… thus, local and state govt stand to loose in a huge way and fast.
The winners, banks with cash available, especially those not tied to foreign investors. People with cash available, looking for bargains in real estate. It may well be a reversal in class structure, where the lower end of the middle class are able to procure homes should they have a substantial down payment. Homes they could not even thought of in years past will sell for 20-40 cents on the dollar.
Protect Homeownership and Crack Down on Mortgage Fraud
Obama will crack down on fraudulent brokers and lenders. He will also make sure homebuyers have honest and complete information about their mortgage options, and he will give a tax credit to all middle-class homeowners.
* Create a Universal Mortgage Credit: Obama will create a 10 percent universal mortgage credit to provide homeowners who do not itemize tax relief. This credit will provide an average of $500 to 10 million homeowners, the majority of whom earn less than $50,000 per year.
* Ensure More Accountability in the Subprime Mortgage Industry: Obama has been closely monitoring the subprime mortgage situation for years, and introduced comprehensive legislation over a year ago to fight mortgage fraud and protect consumers against abusive lending practices. Obama’s STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity.
* Mandate Accurate Loan Disclosure: Obama will create a Homeowner Obligation Made Explicit (HOME) score, which will provide potential borrowers with a simplified, standardized borrower metric (similar to APR) for home mortgages. The HOME score will allow individuals to easily compare various mortgage products and understand the full cost of the loan.
* Create Fund to Help Homeowners Avoid Foreclosures: Obama will create a fund to help people refinance their mortgages and provide comprehensive supports to innocent homeowners. The fund will be partially paid for by Obama’s increased penalties on lenders who act irresponsibly and commit fraud.
* Close Bankruptcy Loophole for Mortgage Companies: Obama will work to eliminate the provision that prevents bankruptcy courts from modifying an individual’s mortgage payments. Obama believes that the subprime mortgage industry, which has engaged in dangerous and sometimes unscrupulous business practices, should not be shielded by outdated federal law.
My analysis:
For those homeowners in a world of hurt, they will receive help. Perhaps with greater allowances in lending practices and help for those subject to fraid, conversion may be a possibility. Real estate will drop in value, although not as much with the Clinton plan. A slow drop in valuation can be a good thing as part of overall market correction.
For those who are speculating, the writing is on the wall. Bogus mortgages and inflated valuation will likely cause these individuals to loose their shirt. Mortgage fraud will be dealt with. Rental prices will drop as these guys go under.
Banks who are cash shy, or mismanaged and dependent upon landfall profits from the subprime are likely to loose money, a lot of money, as will their investors. However, such risk was well known to those in the industry. It is likely the subprime investment pool will dry up, but funding will likely still be available for conventional mortgages.
As property values fall, state and local revenue will decrease, albeit over a longer period of time. Thus there are ways to plan for reductions in spending.
Summary:
Obama’s plan is more sustainable, and has fewer unintended consequences. Either plan will result in the devaluation of real estate in many areas, and a loss to investors. However, the devaluation will likely be a lot less, as will be the investors loss than maintaining the status quo, which likely will result in massive numbers of foreclosures, followed by bank failures sooner or later. The big question, is it enough, and will it happen soon enough.
A quote taken from Barack’s speech yesterday really makes a lot of sense. “We are not standing on the brink of recession due to forces beyond our control. The fallout from the housing crisis that’s cost jobs and wiped out savings was not an inevitable part of the business cycle. It was a failure of leadership and imagination in Washington – the culmination of decades of decisions that were made or put off without regard to the realities of a global economy and the growing inequality it’s produced.” reference
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