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The Great Homeowner Bailout

Unless you’ve turned off all media in your home/computer, you may have noticed the housing mess that’s currently underway in the U.S.  The housing mess has left millions of homeowners with upside down mortgages which can (and has) ultimately lead to foreclosure.

But who should be responsible for this mess?  The government and their deregulation?  The financial institutions and their predatory tactics?  Or the ignorant homeowner who assumed that future unaffordable payments (when their teaser rates expire) could be fixed via refinancing?  Perhaps they all play a part in this perfect storm that has rippled across the globe.

So the question of the day is, does the government sit back and let things play out, or do they jump in and try to intervene?  With the severity of the downturn, I’m not sure the government had much choice other than to try to do “something”.  This something came in the form of throwing money at the problem which they call the bailout package.

As part of a huge bailout package, they’ve recently announced details regarding how the government is going to help homeowners in America.

According to NyDailyNews:

The two rescue plans are:

  • The Home Affordable Refinance program, aimed at up to 5 million people who can’t refinance at lower rates because their home values have been hammered in the downturn.
  • The Home Affordable Modification Program, a more complicated effort aimed at up to 4 million people facing hard times who are in danger of slipping into foreclosure.

As you can see from above, there are 2 separate plans. One is to help homeowners refinance their homes and the other to encourage existing homeowners (with financial difficulties) to make their mortgage payments.

Here are more details:

The refinancing program

  • To refinance, the value of a home has to have slipped below the 20% equity required by standard home loans – but not so far that it is deep “underwater.”

For instance, if you bought a $400,000 home with a traditional 20% down payment and took out a $320,000 mortgage, you could refinance with federal help if your home is now valued at under $400,000. In that case, the loan would be worth more than 80% of the home’s value.

But, you’re blocked out of the program if the house’s value has fallen so low that the mortgage is worth 105% or more of the home itself. In this example, with a $320,000 mortgage, that would be a home value that has dropped to $304,000 or lower. So if the market value of your home is between 80% and 105% of your mortgage, you can qualify.

  • After that, you have to prove to your lender that you can still afford the new mortgage.

The loan modification program

If your home is deep underwater, or you’re in danger of foreclosure and you have fallen on hard times, this is the program for you. Its basic requirements:

  • The unpaid balance on the first mortgage must be under $729,750 for single-family units. Limits are higher for two- to four-family homes.
  • The loan must be originated before this year.
  • The borrowers’ housing costs must exceed 31% of their income.
  • Borrowers must have suffered a “significant” change in income or expenses, such as losing a job, falling ill or seeing their mortgage interest rate skyrocket.

The goal is to get housing costs down to 31% of income. If someone qualifies, the feds sweeten the deal by paying down up to $5,000 in principal over five years to encourage the borrower to meet their payments.

So it looks like the government has come in to save the day (or at least try)! The whole purpose of this bailout is to make sure that homeowners can keep making their payments thus helping keep financial institutions above water. If financial institutions can stay afloat, then they can keep lending thus helping free up credit.

All we can do now is wait and see if the new initiative will make a difference.

What is your opinion on this bailout?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 17 comments… add one }
  • Dividend Growth Investor March 9, 2009, 9:39 am

    The bailout is necessary otherwise we would all be living in caves now, hunting in the forest. However most of the shareholders of financial institutions will be wiped out, as governments essentially nationalize banks by converting preferred shares into common..

  • Four Pillars March 9, 2009, 9:47 am

    This program is very interesting – I personally think the Obama admin is trying to micro-manage too much in this case. Trying to artificially prop up the price of anything is never a good idea.

    Politically, I don’t think it was a good move – I think most Americans absolutely hate it and $75 bills is only a small part of the entire stimulus package.

  • DAvid March 9, 2009, 10:57 am

    Don’t forget, there were also many Americans who entered into a mortgage and chose not to pay any more than absolutely necessary on the presumption that if their financial situation was turned on it’s ear, they could simply walk away from it. Some of these folks felt it better to invest in the market than pay their mortgage. I can understand how some folks who have legitametly tried to meet their obligations might be a tadmupset about some of the bailouts.

    Like the executives, should thes folk who went into the game with their eyes open, and even played the game to its’ fullest, also be excluded from the bailout? They are now in the position they planned to be!


  • 9 OH 2 March 9, 2009, 10:58 am

    I think that this is a good idea. We have to remember that the main benefit coming from all of this is that this problem will not repeat itself. They should apply a BandAid to the current problem and work on fixing the system for future generations. The thing most gloomers forget is that the world will inevitably emerge much stronger after this is all done. More economic regulation and less greed will benefit 99% of the population.

  • Brian March 9, 2009, 11:20 am

    Is there any info about the regulations and policies that the current administration is creating to prevent this from happening again?
    All I see on the news is bailouts, rather than preventative regulations.

  • Mark March 9, 2009, 11:40 am

    It’s rather ironic that in the past, all the talk that was coming from Bush about “socialism” and everything bad that comes with it seems to have worked out pretty good for us Canadians…
    I’m sorry to say this but Americans need to get off their high chair and look at it differently; Canadians have been enjoying great service AND more importantly stable monthly payments when it comes to its mortgage system – hey, try it, if it works great, if not, next…
    Americans have invented capitalism and I love them dearly for it, (I’m self-employed and enjoying every minute of it), but the greater than though attitude needs to disappear; Americans need to review both their banking system AND health system and the best way (FOR NOW) to help them get their system right is to look at socialist system like the one in Canada, Brittain and looky here, Cuba…
    Bush was right when he talked about the disadvantages of the Canadian health system in that surgery was or may be delayed but at least I won’t die of a heart attack or have to sell everything I own since I won’t be getting a bill from the hospital or a f… greedy insurance company who only thinks of profits…(sorry, this side of the equation gets me rawled up everytime)…

  • Mark March 9, 2009, 11:57 am

    don’t forget peoples, you can’t regulate greed…. This will happen again, no not in the next few years but if you look back, every decade had it’s economic glitches, whether it was the oil in the early 70’s, economic recessions of the early 80’s & 90’s…(see the pattern)….

    I think Americans who invented capitalism (which I thank them everyday for – I’m self-employed, working from home & making 50K/yr) need to review their systems as a whole.
    Their banking system went down the tube because of greed; the system in place in Canada gives us the latitude we need to make sure we can make a monthly payment that doesn’t change, but also at a rate that is regulated, (ex: 100K mortgage at 5.49% on a 5 year fixed term amortized over 25 yrs).

    When I was hearing Bush in the past talk about socialism and it’s drawbacks and pitfalls, it made me laugh because it just reaffirmed what I knew; this guy is afraid of what he doesn’t know, listens to people who know even less and therefor it gave him the right to bash it out…

    Obama seems to have the right attitude; whatever or however its called, lets try it; if it works, then keep it but if it doesn’t, next…

    One last note, I remember Bush having said that Canadians health system currently in place make it easy to have to wait several months to have surgery; well guess what bud, it might be the case in some instances but at least I won’t have a heart attack when I get out of the hospital and see the bill I’m left to pay since my greedy insurance company has finally decided NOT to pay it even after it told me it would…

  • Xenko March 9, 2009, 12:04 pm

    “I personally think the Obama admin is trying to micro-manage too much in this case.”

    I think they just want to control where the money is going and that is actually helps people in need.

    I almost want to just say screw them all (irresponsible homeowners and companies). They weren’t responsible, and now they should pay the price. People who have been fiscally responsible are basically paying for other people’s mistakes, which seems like a punishment for being responsible. Big corporations are barely surviving and are still paying big bonuses to the corporate level employees who didn’t know what they were doing and have run their companies into the ground while cashing enormous pay cheques. In a free market, companies that do poorly are supposed to fail *cough*GM*cough*. You can’t just keep bailing out the losers… they are losers for a reason.

    In the end though, I am assuming the bailout was necessary to keep the system alive, but for all I know we would have been better off without it.

  • Thicken My Wallet March 9, 2009, 12:27 pm

    The refinancing program assumes if you are under water, you will walk away from your home. As Buffet pointed out, people walk away from their homes because of an inability to meet the monthly payments not because the value of their home plunged. In other words, it is a cash flow (read employment) and not a net worth issue.

    This money should have been better spent on getting people back to work.

    As other commentators have noted though, this bailout only reinforces the notion that there are no consequences to bad decisions. For an administration who wants personal responsibility, their words ring hallow compared to their actions.

    This does nothing to address the underlying cause of this mess: mortgages with balloon payment clauses, mortgage deductability (which studies have recommended to be abloished but Congress has swept those same studies under the carpet), unsustainable land use policies, lax regulation over mortgage brokering, the fact that the lender in most states have no personal recourse against the borrower personally for the difference between loan amount and foreclosure price etc. etc.

    They may have done better eliminating the exotic mortgages with back-end balloon payments and making the lenders amortizate by resetting the amortization to 20 years from today then giving a 6 month grace period to borrowers to pay the true cost of the mortgage at reasonable rates. Since the U.S. government basically owns all the banks now anyways, they are really the lenders anyhow.

    …but I guess this bailout scores more political points and politics trumps all.

  • 9 OH 2 March 9, 2009, 12:35 pm

    At least the general public will be more aware of the greediness. We should see a resurgence of common sense. There will always be crooks….it’ll just become harder to be a successful crook.

  • Mr. ToughMoneyLove March 9, 2009, 3:38 pm

    The fraud associated with these programs will make the billions in Katrina fraud seem like chump change. First, the program allows lenders to accept a broker opinion as a property valuation instead of a real appraisal. This will be one source of fraud, as underemployed real estate brokers seek out alternative income streams. Second, the programs require an “affidavit of financial hardship” from the borrower. No one will check those, giving us a second source of fraud. Third, the borrower can create “financial hardship” by buying a new car, then claiming that the car payments are budget busters, requiring a downward mortgage payment adjustment. The list goes on. There are not enough competent fraud investigators in the entire government to keep track of all of it. But the program will buy a lot of votes for the party in power which is the real goal.

  • Ms Save Money March 9, 2009, 5:54 pm

    Yes, I do agree with a few of you – I think the government is trying to micro manage. I also think that all the bailouts the government has been doing is wrong.

  • mojo30 March 9, 2009, 6:23 pm

    they need to asses every situation independantly and act, I saw one lady on CNN who bought a $140k house and put $40k dp, her original payment was at around $800/m and then it balloned to $1500 a month..now that is a scam on the banks part and she should be helped..after she is helped though they need to go after the people who set her loan up like that as they are pure fraudsters bar none…

  • 9 OH 2 March 9, 2009, 7:33 pm

    Well said mojo30

  • qmanrei March 12, 2009, 1:07 pm

    The Canadian Version – People who bought 40 year Amortization with 100% financing last year – basically 103% LTV. Now they can get 35 year amortization and 5% down. Those who locked into 1, 2 , or 3 year fixed rates. Watch out!

  • 9 OH 2 March 12, 2009, 1:30 pm

    Here is a really dumb question….where will the 5 year fixed rate be in 2 years?

  • FT FrugalTrader March 12, 2009, 6:35 pm

    9 OH 2, no one can predict where exactly rates will be in 2 years. If I were to guess, I would say higher than today.

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