The government has issued how it is going to “fix” this mortgage crisis. This from The Wall Street Journal:
“Fannie Mae, Freddie Mac and U.S. officials announced plans Tuesday to speed up the modification of hundreds of thousands of loans held by the housing finance giants, marking the latest effort to try and prevent more foreclosures.
The streamlined effort will target certain loans that are 90 days or more past due. The program will aim to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal debt.
Borrowers would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage.”
Let’s break this down.
It wants to make the ratio of the mortgage payment for the homeowner to 38%. This doesn’t make sense for multiple reasons. First, how did they get this number? Second, assuming that this number is a correct amount, who says this is the correct amount for everyone? If someone has eight kids and another person has none, do you think that they originally planned it to be 38% of their income. What if they planned on it being less? Maybe we could assume that if it was less they could afford it, but maybe they cannot because they do have eight kids.
In the same sense, I am not saying that people with kids should get more of a break. I am instead saying that a blanket number like this can have problems. Another problem might be, what happens if the value of the house is more than the 38%. This would be a great deal in which at the end they could turn around an sell off the house. Another key part of this is, who pays if it was worth more than the 38%. Will he have to pay this off for the rest of his life? I guess the people who are deeper in debt will. My question then would be is there a year limit?
Another major problem is now there might be less of an incentive for that person to work harder than if he had to pay this off. It will increase his payments if he increases his income. It acts some what like a tax. So if he worked harder, he would get less to spend. If you assume that this person would completely go under and lose all of his money. I guess this is a decent alternative.
My favorite part is the last line; that borrowers would have to provide a statement with their hardship. Who is going to decide what hardship is? How can you measure this? I could see losing your job, but what if you just had an adjustable rate mortgage that adjusted? Is that an excuse? Of course, that wouldn’t be up to you and me who actually own the money it would be up to the bureaucrat. I bet the first people in line will be their friends.