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Friday, May 09, 2008

Fixing The Housing Problem?

The House finally passed Barney Frank's home bail out bill yesterday, though it probably won't make it through the Senate, or past the veto pen of President Bush. Hopefully there is a compromise bill out there waiting in the wings, one that unlike the Frank's plan helps the folks who need it, not anyone who wants it.

I know that there are a lot of people out there wondering about the Frank's plan, since I wrote about it in early March that has been the top search hit on my blog. (Sorry Tonya Harding, your nake pix search comes in much lower).

Frank's plan, for those who don't remember, would allow a homeowner to refinance the current value of their house into a federally insured FHA loan, provided the lender was willing to take the loss between the original loan and the new value.

I'm not sure lenders are going to run to this program, in any case. While they may look at some loans and think it's worthwhile, they'll probably turn down the short sell offer on a lot of them, figuring they can get a better deal in liquidation sales. While it might be popular in California, Florida and Nevada, where speculators ran up the prices, they'll probably ignore it altogether in the North East, middle south, and Texas where the housing market hasn't taken such a big hit.

Frank's plan also allows borrowers who wouldn't qualify under current FHA lending rules to participate, based on having the income (but not credit worthiness) to make the new payments.

One of the things I find oddest about this plan is that the very reason for a chunk of the housing market problem, according to congress, was lenders allowing people who shouldn't have qualified for a mortgage to get one. Now, they want to change the rules so that the government can guarantee those same types of loans! Evidently making bad loans is only okay if the fed's are involved.

There is one good point, if the owner makes a profit on a refinancing or sale of the home, part of those proceeds go to the feds. I'm pretty sure though that decent accountants will figure out a way to shield a lot of that money.

Here's my prediction, should the Frank's bill pass as is. You'll see a six month drop in foreclosures, as a number of people refinance into the FHA program. Then, in about 12 months, foreclosures of those loans will spike, and we'll have Congress pulling in the head of the FHA to find out why he needs so much money to pay off those loans.

Here's a few common sense changes I'd like to see before they pass anything.

First, if the person applying owns two homes, and isn't behind, or upside down on one of them, they be required to sell it, and use the proceeds to pay part of the difference in the loan they want to refinance. Right now 25% or so of foreclosures are on second homes, those folks shouldn't be rewarded.

Second, the loans need to go to people who have paid their bills (other than mortgages) on time. In other words, help those who obviously are trying to keep up on their other bills, but can't because of the mortgage. Suspending credit rules to refinance allows the worst offenders to get the biggest break, and they probably deserve it the least.

Third, require automatic payment debits for the mortgage after refinancing. If that's going to cause a hardship, the borrower probably can't afford the new mortgage either, and needs to become a renter.

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