Kathleen Pender, in the SF Chronicle asks: Are you an idiot to keep paying your mortgage?

[randomness]

From http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/15/BUQR1442LQ.DTL:

Should you keep paying your mortgage?

If you have significant equity in your home, absolutely.

If you don't, it's getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.

Last week, the government announced a program that will substantially lower payments for many homeowners who have little or no equity, but only if they are at least 90 days delinquent.

The Federal Housing Administration is offering two programs to help homeowners get more-affordable mortgages, FHA Secure and Help for Homeowners. Neither requires borrowers to be current on their payments.

The program announced Monday goes a step further by requiring homeowners to be late.

The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac and 27 loan servicers, promises to swiftly reduce payments for certain homeowners who appear to be on the verge of foreclosure.

How to qualify

To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home's value. It's fine if you owe more than it's worth.

Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies.

If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment - including property taxes, insurance and association dues - to 38 percent of your gross income.

The reduction can be accomplished in one or more ways:

-- Reducing the interest rate, but not below 3 percent. (The new rate, if below market, goes back to a market rate after five years.)

-- Extending the term of the loan up to 40 years.

-- Reducing the principal on which monthly payments are calculated. Unpaid principal is added to the loan balance and due when the homeowner sells or refinances. The reduced interest payments never have to be repaid.

If you owe more than the home is worth, the plan will only reduce principal down to 100 percent of market value, according to an official for the Federal Housing Finance Agency, which supervises Fannie Mae and Freddie Mac.

If all three of these maneuvers can't reduce your payments to 38 percent of income, you won't get a fast-track modification but could still request a customized deal, says the official, who spoke on the condition of anonymity.

The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won't be expected to sell them to pay your mortgage.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."

The government is offering loan servicers $800 for every homeowner they get into the plan.

Schiff predicts that loan agents "will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan."

Risking your credit score for a lower rate "sounds like a game of chicken on the lending highway," says Craig Watts, a spokesman for Fair Isaac, which markets the FICO credit score.

A 90-day delinquency will hurt your score, but not as badly as a foreclosure. How many points it takes off depends on other things in your credit file, such as the number and severity of late payments on other accounts.

In the latest version of FICO, which is just being rolled out, "one isolated delinquency will do less damage to your score than it has in the past," Watts says.

Consumers who suffer a severe delinquency can rebuild their scores over time by paying all credit accounts on time and keeping their balances low.

"If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I'd be for keeping the home," Watts says. "Your score will bounce back."

Schiff predicts that many homeowners will reach that conclusion and that the new program will cost Fannie and Freddie far more than expected.

I think I want to do some research on the program before I conclude I should have bought a house during the bubble.

Comments

[intuition-ist.livejournal.com]

this is typical conservative double-speak for "see, those irresponsible poor people? they can't pay their mortgages and then they expect people to pick up after them, and oh by the way they'll try to weasel their way out of paying even if they can."

i call bullshit. this is a huge nationwide problem, and if thousands of people default on their mortgages, they'll be out in the street and the banks who lent 'em the money will be bankrupt. the nation as a whole will suffer.

this "deal" is for desperate people who didn't really understand what they were signing up for, or how badly it could go wrong. anybody smart enough to game the system in the way described in the article would not be in that situation in the first place.

adjustable rate mortgages ought to be against the law. :(

[browngirl.livejournal.com]

Well said; also, your icon is gorgeous.

[surrealestate.livejournal.com]

That may be partly true, but if the guidelines are as they were laid out above, then it does seem ripe for people to take advantage. I mean, come on, they don't look at assets *at all*? Doesn't that seem a little unreasonable?

People already taking advantage of the current market is part of what's made it harder for some people to get loans. I don't see why this big opportunity would go unused. A lot of people who got ARMs were plenty smart -- they thought they could make the system work for them and some of them were wrong. Plenty are smart enough to see this.

(And in any case, I'd bet that over all, most people who've gotten ARMs over the years made out just fine. It's only the people who got them at the wrong time and couldn't refi who are getting screwed.)

[r-ness.livejournal.com]

So, my view of this is a bit more nuanced. It's been said that you can't feed the birds without feeding some squirrels. This is true whether the squirrels in question are individuals with mortgages, or (as belfrynotes mentions) insurance companies or banks. Or, to take the latest big problem, the automakers.

(I now have this really silly image of a squirrel not having enough acorns to pay his monthly mortgage payment, but anyway...)

There are always going to be people who game the system. I disagree with you that "anyone smart enough to game the system in the way described in the article would not be in that situation in the first place", but that's not really the question at hand. The question is, given the rules, are we going to accomplish what we collectively want to do--keep the economy afloat by feeding enough birds--without letting all the squirrels eat all the birdseed.

Because at the end of the day, despite the snide remarks I make now and again in this LJ about our government printing money, there isn't really an infinite supply of birdseed. (If there were, it wouldn't matter, and I'd be standing in line for my own share.)

Finally, ARMs are conceptually no different from teaser rates on credit cards. I've taken advantage of the latter myself, and made money on them, so I personally would really prefer it if there weren't legal restrictions on those particular terms of credit. I would obviously be in favor of strong regulations on explaining to borrowers what terms they're borrowing under.

[malkin.livejournal.com]

I bought a house during the boom on a 5-1 ARM, got laid off TWICE while owning it, and tried to sell the house during the bust. I should have been screwed six ways 'til Sunday, but we ended up selling the place AND walking away with some cash. My biggest recommendation to people is to buy way less than you can afford, and make sure you're getting good build quality. Too many people are willing to pay stupid amounts of money for a hulking palace full of chintzy veneer, when a more humble place with good bones would be a better investment.

[belfrynotes.livejournal.com]

I agree that ARMs are not inherently evil. As for individuals taking advantage of a poorly written law, see r_ness' previous post about insurance companies buying banks so they can get bailout money, or the fact that AmEx is now a bank for the same reason. People always seem to put much more creative energy into getting around regulations and rules than is put into the writing of those regulations and rules in the first place.

[r-ness.livejournal.com]

People always seem to put much more creative energy into getting around regulations and rules than is put into the writing of those regulations and rules in the first place.

Incentives, incentives.