The Obama administration is kicking off a new program designed to help up to 9 million borrowers stay in their homes through refinanced mortgages or loans that are modified to lower monthly payments.
The Treasury Department on Wednesday released detailed guidelines designed to let the lending industry know how to enroll borrowers in the program announced last month.
To help borrowers determine if they are eligible, the government has put answers to common questions and assessment tools on the Web site www.FinancialStability.gov.
“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” Treasury Secretary Timothy Geithner said in a statement.
On Tuesday, key moderate Democrats in the House wrote a compromise to a housing bill that requires bankruptcy judges to consider whether banks offered homeowners reasonable loan restructuring deals before they weigh in with judicial remedies.
The new language is expected to ease the bill onto the House floor for a vote as early as Thursday.
Borrowers also would have a responsibility to prove that they tried to modify their mortgages with their lenders before seeking help in bankruptcy court.
The deal would require judges to consider whether homeowners were offered a “qualified” loan workout – defined as one that would set monthly payments equal to about one-third of a homeowner’s income.
Bankruptcy judges would have to deny a judicial mortgage adjustment in cases where the homeowner is deemed able to afford the loan.
The changes bring the legislation closer in line to what President Obama’s administration has sought and what the banking lobby finds acceptable. The mortgage industry has argued that unfettered access to bankruptcy court mortgage modifications would impose steep and unpredictable costs on its companies that would be passed along to borrowers as higher fees and interest rates.
Their opposition helped derail the bill last week, even after leading Democrats agreed to restrict it to people who had tried other means of reworking their mortgages and those who couldn’t afford their home loans.
(Source: CBS News)
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A better approach might have been to argue that when a lender agreed to a loan that both it and the borrower knew was impossible to pay given the borrowers income, and both intended to pay off the loan with the capital gains as the property appreciated, to treat the mortgage as the what the parties really intended, which was a joint investment, meaning they should share the loss just as much as they intended to share the capital gains.
The current approach may end up rewarding speculators, rather than saving people who are being foreclosed due to no fault of their own.
One should note that a “traditional mortgage” with a set rate and constant payments that was affordable three years ago, will still be affordable even if “underwater” as long as the buyer’s income didn’t disappear (for an unrelated reason).
“At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”–Warren Buffett, World-Class Investor
This is exactly backwards from how the process is supposed to work. It is backward from the way free markets work, the way basic logic works.
The virtue of the “creative destruction” process is that, when the business cycle goes through a downturn, capital is transferred from weak hands to strong hands.
Failure is a vital aspect of the free market because if failed experiments are not shut down, the experiments that work will not have the resources needed to expand. Without failure, the market has no way to reorganize and revitalize itself.
In more concrete terms, think of it from the perspective of a business owner. Imagine your business has two divisions and a general manager for each division. One of those managers is hard-working, savvy, and consistently profitable. The other is a complete idiot.
So… do you punish the smart successful manager for his success, and reward the idiot for his failure, by pouring more funds into the flailing division at the expense of the one that’s working?
Of course not. No sane business owner would do that.
But if your name is Tim Geithner, and your title is Secretary of the Treasury, and the idiot in question happens to be an old Wall Street pal, then that is exactly what you do.
And when successful outfits like Berkshire find their opportunities constrained by the likes of the government propping up Citigroup – a ship of fools if there ever was one – the above is roughly what happens. The idiots get continued funding, while the diligent and prudent get punished for their wise stewardship.
As a result, the market does not heal itself. Money does not flow to where it will be best treated and best allocated. Instead it gets dammed up in stagnant pools, good for little more than attracting mosquitoes and leeches. Bad behavior is rewarded; good behavior is ignored or worse yet punished. Brain-dead politicians, seeing their initial dose of medicine is not working, then call for a bigger dose of the same.
“Deepthinker”:
If you’re going to post articles written by someone else in a comment, the least you could do is acknowledge that fact and even provide who wrote them.