On Home Affordable Modification Program (HAMP)


The HAMP and other loan mod programs are simply extend-and-pretend in that

(1) The banks don't have to write down the loans losses now so they can keep pretending that the loan is worth more than it is

(2) The borrowers don't have to face up to the fact that they can not afford the house and that it will be 20-30 years before it reaches what was its peak price - and they can extend the fantasy until the modified loan resets back to the original terms in about 5 years and thenn they go into foreclosure.

ALl these bailed out debtors who owe more than the house is worth are not homeowners at all - they are simply renting from the bank and odds are they are paying more than the house would rent for on the open market.

The loan mod standards are unrealistic. They do not follow good lending practice by having a front end AND back end debt-to-income ratio. They do use the front end ratio of 31% - meaning that the loan payment can not be more than 31% of gross income. They are not, however, using a back end DTI of setting a limit on how much fixed debt the borrower can have. Fixed debt would be the house + the car payment + the credit card payment + the school loan payments. That back end DTI should not be more than 41% of gross. (And 31/41 DTI ratios are still very high. 25 years ago it was 25/31 for the two DTIs.) Without looking at how much total debt the borrower has is a recipe for failure.

So all that happens is a lot of houses which will eventually end in foreclosure are stuck in the pipeline and the process drags on and on and on and..... That means that the readjustment of housing prices drags on and on and on.....

And as for Mr. Zandi of Moodys with his nonsense that Treasury should MAKE the lenders write down the principal, I have to ask 2 things:

(1) Where on earth did he get his law degree - if any? The Federal government can NOT 'make' the lenders forgive principal without substantive and procedural due process for the taking of their property (the right to the money). And the only way that can be done is through a bankruptcy proceeding which would cram down the loan - and the Republicans have a conniption fit at the idea of allowing primary home loans to be crammed down in the same way loans for business real estate, cars, 2nd homes and everything else is crammed down in a bankruptcy to current market value of the collateral.

(2) No way, absolutely no way in hell, would the vast majority (the 90% not in foreclosure) stand for the taxpayers handing over billions upon billions to the the banks so that (a) the banks don't lose a penny and (b) the defaulting borrower's loan gets paid down for them by the rest of us. ANy suggesstion that the 90% who are paying their mortage or rent should ante up the money to pay down the mortgage of someone who can't pay their bills so that the banks don't lose a penny and the Wall St bankers can get their obscene bonuses would nigh on provoke armed revolt. That would be political suicide for a politician.

These programs are a debacle. Better to just let the inevitable foreclosures run their course quickly and get it down. If there is going to be pain, better fast than slow. Once it is over, then you can pick up the pieces. Closing one's eyes and whistling past the graveyard is not a plan.

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