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Last week the Senate, Congress and President Bush approved an estimated $700 billion bailout rescue plan meant to stabilize our financial markets and stimulate lending between banks, and to businesses. From what I understand, the plan would allow the government you and me to purchase risky assets (loans) from banks. This would give banks more lending power, free up capital and make their loan portfolios contain less risk, potentially “unfreezing” the nation’s credit markets and making financial investments more stable. I have a feeling that many of the most intricate details of the plan are still unknown to most, if not all of the plan’s creators, but one thing most experts can agree on is that the plan will help prevent a worse global economic problem. Unfortunately, this is probably the first of many plans needed to undo the damage caused by many bad decisions made by citizens, institutions and the government. Most Americans won’t feel the benefits of the plan for some time, if at all, but one piece of legislation that I feel has the most potential to curb long-term damage and actually help “main street America” is a portion of the legislation known as the “Hope for Homeowners Act of 2008”.
Our Nation’s Wealth
It is no secret that much of America’s wealth was gained through real estate investments. Whether it was from multiple investments, or from one long-term investment made on a family home that gained equity, real estate wealth has (or had) created a retirement nest egg for many Americans. Unfortunately, the recent recession in the real estate market has made most American’s lose fortunes in real estate. The amount differs from family to family but there is no family in America that has not, or will not eventually lose money from this recession.
The Equity Problem
In the past, most American families bought a home and slowly paid the mortgage down, at the same time they typically earned equity on the value of the home. Unfortunately, nearly every home in America has decreased in value over the past 3 years; many homeowners are upside down on their homes – whether it’s $20,000, $50,000, $100,000 or $200,000 + it’s a fact of life that many homeowners must learn to cope with. It will take several years for these homes to regain the value they lost and several more years to begin earning any equity. The losses that we are realizing today, will be felt for years to come and will make it impossible for many Americans to earn money from their real estate investment. The Equity Effect of this recession will have lasting effects on our nation’s economy, and our ability to retire. Real Estate investments that would typically provide a family with thousands in equity over several years have dwindled down to investments that may never provide a return.
The Foreclosure and Short Sale Problem
Turn on your TV, flip open your laptop or open a newspaper and you are sure to stumble across something mentioning the millions of foreclosures our nation’s families are facing or the thousands of short sales banks are accepting. Adjustable Rate Mortgages (ARMs), subprime lending practices and other creative lending options have left many Americans with raising monthly mortgages and many lenders with risky assets. Forget about the social and economic impacts of a foreclosure on a family, and the economic impact of holding onto risky assets for lenders, and focus only on the negative impact on real estate prices, and you are still staring at a problem suitable for government intervention. No, I am not a fan of government intervention but the lack of regulation and accountability has created a problem so large that only the government could foot the bill for a solution. As long as we have millions of foreclosures and short sales affecting every real estate market across the country, home prices will not stabilize. It is a simple fact, if homes in every neighborhood across the country are sold at a discount; those homes influence the price of all homes in the neighborhood. It is the reason why home builders attempt to offer incentives instead of price cuts, decreasing the value of one home will decrease the value of another home within the surrounding area. Until we stop foreclosures and short sales, we cannot stabilize home prices and real estate investments.
The Home Builder Problem
According to an article on builderonline.com, the construction industry employed 11 million people in 2007 (commercial and residential). This figure does not include the millions of Americans that make a substantial amount of their income from the construction industry: real estate agents, appraisers, loan officers, interior decorators, the list goes on and on. There is no doubt that the amount of workers employed by, and earning a living from, the construction industry has already decreased in 2008. As long as this real estate recession continues, workers earning a living from the industry will continue to lose jobs and income. It is only a matter of time before many home builders, large and small, lose the constant battle to keep their businesses open. The Home Builder effect may not only cause millions to lose jobs, but millions more will lose fortunes in investments.
The Capital Problem
Millions of homeowner’s are in debt and working hard only to barely make enough money to pay their bills. As the equity, foreclosure/short sale and home builder problems continue, more and more Americans will find it difficult to pay their debts each month. The capital effect is already affecting sales of products and services resulting in less revenue for American businesses and less work for American workers. Layoffs are occurring at an alarming rate and many more job cuts are expected over the next few months as American businesses prepare for what may be years of slow economic growth. In addition, the global credit crisis is making it hard for businesses and consumers to borrow money – stocks are plunging and American wealth is evaporating.
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The Hope
The hope is in the details. Hud.gov reports that homeowners, and our nation, may find relieve from legislation within the $700 billion rescue plan. Here are the details from the hud.gov webpage:
“Sustainable, Affordability Homeownership
Hope for Homeowners maintains FHA’s long-standing requirement that new loans be based on a family’s long-term ability to repay the mortgage. FHA only allows owner-occupants to be eligible for FHA-insured mortgages. Borrowers must also meet the following eligibility criteria:
• Their mortgage must have originated on or before January 1, 2008;
• Their mortgage debt-to-income must be at least 31 percent;
• They cannot afford their current loan;
• They did not intentionally miss mortgage payments; and
• They do not own second homes.
Features of FHA-insured loans under the new program include:
• 30-year, fixed rate mortgage;
• Maximum 90 percent loan-to-value ratio;
• No prepayment penalties;
• $550,440 maximum mortgage amount;
• Extinguishment of any subordinate liens; and
• New home appraisals from FHA-approved appraisers.”
Additional information found on another webpage within the hud.gov web portal:
“Affordability versus value: lenders will take a loss on the difference between the existing obligations and the new loan, which is set at 90 percent of current appraised value. The lender may choose to provide homeowners with an affordable monthly mortgage payment through a loan modification rather than accepting the losses associated with declining property values.”
More details about the plan are available on hud.gov but one mentionable stipulation is that equity gained from the sale of the home, after adjustments are made, will be split between the homeowner and lender. The amount of the proceeds from the sale that each party gets depends on how long the homeowner holds onto the property after the loan adjustments are made.
The Hope For Homeowners Act of 2008 is an unfortunate necessity in an era that will forever be remembered by all Americans as an era of little regulation, bad decisions and bad lending practices. If done correctly and with enough financial commitment, American families may once again realize a return on investment from real estate; foreclosures and short sales will no longer plague home prices and home builders will rebound to once again offer millions of Americans a stable income and quality investment opportunities. I can only hope that the need for measures of this magnitude will never again arise.
Do you think the Hope for Homeowners Act of 2008 will help?
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Nice post and very informative. I’m totally in favor of the Homeowners Act, I feel this will greatly reduce the financial stress caused by the housing market crash.
Affordability versus value: lenders will take a loss on the difference between the existing obligations and the new loan, which is set at 90 percent of current appraised value. The lender may choose to provide homeowners with an affordable monthly mortgage payment through a loan modification rather than accepting the losses associated with declining property values.”
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Great job explaining how things are intertwined. I sincerely hope that it helps struggling homeowners (and everyone else). Stumbled it as well. I think the media helped make the problem as well. After all, how many real estate shows are on TV showing how easy it is (was) to make money in real estate flipping homes?
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The Best thing in your post is how the financial industries and construction and real estate industries are all interlinked.I’m totally in favor of the Homeowners Act, I feel this will greatly reduce the financial stress caused by the housing market crash.
While I agree that something had to be done immediately and I hope this act is it. My concern is that it will stop there. I still believe that the underlying issues will remain and unless they are dressed we will eventually be right back to where we started.
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I love your cartoon! Thanks for the info. It was very informative and just a great summary of all the points.
I think this program is a joke. The intentions were good, but it will fall flat. My mortgage is held by Citimortgage. Even though I meet all the requirements for the Hope For Homeowners Program, they will not provide it to me. They say it’s a “bad deal” for me. More likely it’s a bad deal for them. They don’t want to lose money. I think if you meet the criteria for the program then the lender should be required to assist you with it. And by the way Citimortgage is just my servicer, Fannie Mae actually owns my mortgage. According to them, thay have no obligation to require their service companies to offer the program. I find that hard to stomach considering Fannie Mae is now under jurisdiction of the FHA who are administering the program. If anyone should be on the ball trying to help the clients it’s Fannie Mae!!!!
I can’t believe that they denied you. What was the reason they gave you? “bad deal”? The government provided the program for people and I can’t understand how they are able to just say sorry no can do? Does anyone have any advice for Jodie?
What about people like me who qualify but do not have an FHA loan? Bank of America holds my fixed rate conventionl mortgage of 9.125%.
great article and very informative. I liked how you tied everything together
well, hi admin adn people nice forum indeed. how’s life? hope it’s introduce branch
That cartoon sums up the sitation perfectly!
The scheme does sound like a joke, how ironic that it is called hope!
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It is my understanding that this program has done little to nothing to help out homeowners…
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This program has done NOTHING to help homeowners. It is just another blank check that the government has wrote on the behalf of our childrens children. If they really wanted to help the housing market, they should provide more incentives to the person spending the money! Money that is allocated at the top of the food chain, does not dribble down to the citizens…arrrg
Thanks
Scott L.
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Well, if they really want to help us out, they should should stop throwing money into the air and find a better solution. You can’t fix everything by throwing all our money at it. That’s why we’re in debt, Hello!