Columnist does "hatchet job" on housing rescue bill

Sunday reading: My favorite housing columnist*, mortgage broker Lou Barnes, turns in a convincing criticism of the new housing bill this week, arguing that the "rescue" for troubled borrowers makes very little economic sense for many borrowers who bother to do the math. Barnes calls his column a "thorough hatchet job" on the bill.

Here's the math, as Barnes does it: Take a borrower in a "bubble zone" who borrowed $190,000 to buy a $200,000 home, using a typical product: a five-year, interest-only ARM. The house is now worth only $150,000, and under the new federal "rescue," the borrower might qualify for a new mortgage of $135,000. What's wrong with that? Plenty, as Barnes explains.

Current payment, under the interest-only loan, is $871 a month. It's about to jump to $1,167, which is a problem. The new payment under the federal program (a 30-year fixed with mandatory FHA insurance) would be $1,020. Better than the reset but still a big increase. Plus, Barnes reasons, the house would probably rent for $700. Plus, he reminds us, if the borrower takes the new federal deal, the borrower loses out on half of the future appreciation if the housing market recovers. Barnes predicts a borrower in this situation would simply walk away from the $1,167 reset and rent nearby for $700.

A far-out example? Barnes is a mortgage broker. He thinks it's "mainstream" and believes it explains why Americans will continue to walk away from their mortgages.

*Why I like Barnes: He knows the mortgage business -- he's in it -- and writes an engaging, salty, passionate, timely, smart column every week about the mortgage market, the housing market, the economy and the Fed. Find his archive at www.boulderwest.com.

--Peter Viles
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Treasury Secretary Henry Paulson via L.A. Times

Comments

[sfvrealestate]

For a different take on the economy and the effects housing bill, here's a link to Peter L. Bernstein's column in today's New York Times:
http://www.nytimes.com/2008/08/03/business/03view.
html?_r=1&ref=business&oref=slogin
Sorry, no tiny url. Barnes is way too theoretical for me.
BTW, Peter, I really liked your summation of the "Good Time to Buy or Not" article in today's L.A. Times which you blog about here.

[Chris Pepper]

This bill has nothing to do w/ borrowers or first time buyers. Barnes is right. Also, did anyone see how the $7500 tax credit to first time buyers is a credit that needs to be paid back. Yes, the credit will be recollected by the federal government over 15 years. So its a refundable tax credit. This bill was signed into law to give these guys a life line to Freddie and Fannie and that's it. They slap some lipstick on it and roll it out to the public as this great thing that's going to help us all. Lame.

[RM]

I don't ever see any homes rent for $700 per month where I live, maybe a studio but that would be it. Average house rent I see is at least twice that amount. But assuming a someone decides to walk away from a fixed payment of $1,100 for the next 30 years for a rental that will start at $700 per month. It is only a matter of time before his rent will be higher than his current mortgage and then the savings are gone. Rents in our county went up 10.8% last year but do the math at 5% if you would like. Keep in mind that the investor who may end up buying the house will ultimately want to make a good return on his investment, even if he has to be patient and do so a little bit at a time.

[Nelcisco]

I agree sfvrealestate, Barnes is a bit theoretical although he make good points. The average borrower just wants a mortgage pro who's competent and honest that can make them feel secure

[Laker]

From Barnes: "...Current payment, under the interest-only loan, is $871 a month. It's about to jump to $1,167, which is a problem..."

WTF????
If you can pay $871 and your payment rises by $300 and that is killing you and your family, it means you could not afford the $871. This is BS. How can you live in a house where a $300 extra monthly bill will bankrupt you?
I could understand if the payment would jump to $2000 from 800, but not the mere change...
The killer of this bailout is that people would realize that they can rent same place for $700...
Speculators and investors would still enjoy this deal by sucking the money from the government and banks as they will refinance it from the bank somewhere before they sell it again and thus will NOT share the 50% of the appreciation...sweet deal... as I believe Cal has pointed out.

[Cal]

Lou has had one solution only to everything since this began, that the Gov't bailout everyone by taking the bad loans onto its balance sheet and dispose of them RTC style over time. Anything less than that meets with his disaproval.

That said, I am in full agreement that the FHA portion of the bill won't do much. He makes a mistake on his understanding of the bill though, the borrower doesn't get hit with the up-front mortgage insurance premium (also known with the sexy moniker of UFMIP) of 3% but it is the lender who must pay that (and any fees, like appraisal fee for example). The lender writes down to 90% of the currently appraised value OR a value that is affordable to the borrower, whichever is smaller (FHA defines affordable depending on many factors, but under a manual underwrite the front end ratio is capped at 31 and the back end 43, iirc). Then the lender pays the UFMIP to FHA and in return the remainder of their mortgage balance is guaranteed by the US taxpayers. Based on all that they should net a max of 85% of currently appraised value.

For SFVRE link, I always enjoy people saying we have to stop the price declines then of course not offering a solution for doing so. In real terms (that is real dollars, not nominal) the price declines won't stop, there is no free lunch. You can either have inflation and ruin the economy but house prices stop declining in nominal terms (we print so much money and the dollar becomes worth less so the houses fixed in price in time get paid back with those lesser value dollars). Or you can have a good economy and prices still falling. Any solution that claims to be able to arrest house price falls and remove TRILLIONS of dollars from economically relevant purposes to divert to paying off overpriced houses is going to significantly affect the economy. For example, "socializing losses" means paying higher taxes, higher taxes is money not spent growing the economy. I always love the magic wand approach that many writers take to solving the biggest credit bubble in human history (which the author of the article misses completely and can't understand why all this is happening). For someone claiming to be a economic historian he should be ashamed of himself.

Prices staying out of equilibrium isn't a viable solution, it is only being proposed at some level because the banks can't absorb the losses that quickly and keep lending. But as the banks recapitalize and shed mortgage assets it becomes less of a issue.

[Rational Renter]

This is a good breakdown of one of the reasons this voluntary program will have minimal-to-no effect on the downturn. The other (and bigger one) is that it just doesn't make financial sense for banks.

Perhaps the politicians are smarter than we think, though. They realize that this is a wholly necessary correction, and that to delay or impede its progress would put the American economy in serious long-term jeopardy. So they have crafted a bill that is politically advantageous ("we're trying to help struggling homeowners!") but really will do nothing.

[l.a.guy]

I'm glad to see congress protecting the tax payers interests (of course they'll piss the money away on something else), but by tacking on a point and half, taking half to all of the profit (depending on the circumstances) and requiring the 1st time buyer tax credit be paid back, it's hard to see why you're not better off walking away from the loan.

I suspect that the only ones who may take advantage of the program are those under-informed borrowers who are steered into it by mortgage brokers looking to make a commission.

[Seren]

Lou Barnes & Glenn Beck are the only 2 people at CNN with a brain.

[Larry]

What about the mortgage interest deduction? Holding onto the house doesn't look so bad.

[darrin kinney]

Peter,
Do you think you are focusing too much on political stupidity than that actual physical crises and data?

I DO.

What congress is doing is worthless to value of your blog. Yes I completely understand how stupid it is to tell someone else what they should or should not be writing, but your blogs have gotten so politically focused that I am getting turned off.

I for one want to see profiled home, what they sold for originally, what they are selling for now, what bank took over the loan, what they are doing with it now. i want to know more about the foreclosure process. I want to know what is happening to the money which is quickly dissapearing.

I also want to know about local home builders and contractors. There were tonnes of local contractors setting up shop as framing contractors, general remodel contractors, etc. What are there stories?

Also what happened to the billions of profits which were made over the past few years? That money didn't dissapear.. well unless the sellers reinvested the money. But that would be fascinating to read about what the sellers of the past 2 years did with their money and profits they made.

[sunsetbeachguy]

Lou Barnes is not based in a bubble zone and is utterly misinformed on bubble zone economics.

Show me a $200,000 house in a bubble zone.

Who cares if you lose 20-40% on a 200K house, most fiscally responsible mere mortals can recover from that kind of loss.

Use some real bubble zone numbers. 20-40% off of a $1M home and those losses aren't absorbable by most people.

[Scott]

I don't know, Peter. You reduce someone's mortgage by 55K and they still bitch about it. Just very ungrateful, undeserving people.

I don't mind the money coming out of the bank's hide though. That'll teach them a thing or two about managing risk.

[Ace]

I think everyone is looking at how this bill will affect us living in a bubble. Much of the rest of the country already has median housing prices in line with median incomes.

This bill may help to keep those markets from continuing to fall. Will it help LA homeowners? Not likely.

[letitfall]

Darrin Kenney,

I've got one for you. The couple that bought my tiny 1200 ft^2 house in Glendale in 12/02 paid $340,000, which I thought was ridiculous, sold in 12/07 for $575,000 and sold all US-based stocks as well as their co-op in Mammoth for a total profit about $700,000, and moved to Switzerland, quickly converting their currency to Euros. Yes, he did a fancy no-down loan and all of that, readily admitting that he was "gambling" with tax-payers' money, as California is a non-recourse state, and he won. What about all of thee profit-takers?

Another one? Four of my siblings work for Lennar, Centex, and Pardee. Each makes about $150,000/year plus bonuses, which have yet to be cut. The question that they still can't answer for me is this: in 1998, these companies were making good profit when new homes sold for $200,000 in Santa Clarita, Valencia, etc.; how can they not be making a profit when they have "drastically" reduced prices on these same homes to $550,000?

[AreYouKiddingMe]

letitfall: one factor -- though not the only one -- is that building materials prices shot through the roof after Katrina, as did the cost of skilled construction labor.

[AreYouKiddingMe]

Ace: You're right. Our market here in the Southeast US has actually started to turn. Y2Y sales and prices went up last month. Not a lot, but up.

[Michael LittleBig]

Congratulations to the members of Congress who passed this housing bill.

Thank God for the wealthy Congress people who had the foresight to pass this bill and take the National Debt to 10.6 Trillion Dollars.

We should remember that these are the same Congress people who will have spent over 1 Trillion Dollars on an oil war.

Let me see if I have this straight:
Freddie and Fannie will now have money to save them. These are the people who buy all the mortgages from the banks. If the wealthy and powerful banks could not sell their mortgages then they would go out of business or be accountable for their actions.
I read the other day that Fannie and Freddie have 800 billion in mortgages and those mortgages represent 60 billion in value. Thank God, we the taxpayers will only have to pay 740 billion to save Freddie and Fannie. It was either the Fannie or Freddie boss that took home 60 million in one year.
I would suggest to save money, that we combine Freddie and Fannie into the Frankenstein Mortgage Company with offices in Bad-bag Iraq.

With this bill we help the first time homeowner with $7500. Is this so that they can buy foreclosed housing which is a blessing for the wealthy and powerful Banks ?

Here is the one I like the best. It reminds me of Am Trust Bank, Cleveland Ohio, who foreclosed on my home of 7 years. This is the bank that threatened and promised me in writing that they would file a frivolous lawsuit against me for fighting my foreclosure. This is the same bank that refused to discuss the issues and the violations of law that caused the foreclosure.
Well, billions of dollars have been set aside for people that meet certain criteria to refinance their present mortgage to SAVE them from foreclosure. THEIR BANK IRONICALY HAS TO AGREE to this to make it happen. This of course involves 400,000 homeowners. What about the other millions of homeowners pending foreclosure?
Well now, these banks are the same ones that operate under the” Lynch Mob” program. The bank forecloses the home and then hangs the borrower. You see, the borrower in the USA has no RIGHT to contest or to fight their foreclosure with in the federal regulatory system, because the Congress won’t permit this to happen. Why? This protects the federally chartered savings banks.
Therefore the Bank which is regulated under the federal regulatory system operates with impunity—there are no federal consumer banking regulations. Banks accordingly conduct their mortgage lending activities knowing the borrower has no redress with in the federal regulatory system.

My question is, WHAT ABOUT THE 4 MILLION PEOPLE IN FORECLOSURE OR WHO HAVE BEEN FORECLOSURED?
Are these not the homeowners who started this foreclosure crisis? Are not these the same people who have no rights to fight their foreclosure within the same federal system that the banks in the same federal system are lending mortgage money? Can’t these homeowners fight their foreclosure doing the big dollar LEGAL DANCE? You know, the borrower’s attorney and the bank’s attorney dance before the Band (Court) until your money runs out. And you out there who blame these homeowners who lived high on the hog and who demanded that the banks give them a mortgage they could understand and could not afford. You are right. No more bailouts for the lowlife home owners who were the cause of this foreclosure crisis, which made this lending system so profitable for the wealthy and the powerful. You are so righteous. You are so wrong.

Thank God for my Ohio Senators, newbie Sherrod Brown and which way is the wind blowing George Voinovich for spending every cent the taxpayer has, plus 10.6 Trillion dollars that we don’t have. I can sleep well in Cleveland Ohio under the 9th Street bridge knowing that my ex attorney and the bank were at the dance having a financial wrecking ball.

This bill basically protected the entire mortgage system and the way it operates and those who profit because of the system. The Bill did not protect those among us who had nothing to gain, but everything to lose. Congress dealt a low blow to the American homeowner.

The idea was to pass something, they passed nothing.

Michael LittleBig

[IToldu2CashOut]

So whats the problem? Sounds like an excellent bill if that are the results.

[oh boy]

RM, could you also find a $200k home in your area where you "don't ever see any homes rent for $700 per month"? My point being, what's being discussed here is national and not LA centric.

None the less, while I think Barnes is right on the money, his point is moot. These so called "homeowners" that can't afford their $1k mortgages aren't smart enough to do the math and won't walk away versus paying the 30-yr fixed refi.

[RM]

Oh boy, the last time an average house in our area sold for around $200K was about ten years ago, but even then the typical rent on such a house was about $1200 to $1400 per month. That's why when interest rates dropped sharply, buying a house was a no brainer, and the stampede to buy a house began. The mortgage payment and the rental payment were about the same.

I am aware that the example given in the article is a national average figure. The point I was trying to make is that eventually rents will supersede a fixed mortgage payment. Given todays inflation report, that may happen sooner than most people think. My first house payment some 20 years ago was less than $700/mo. Today, that same house would probably rent out for about $1800/mo.

Another example, I've owned my own business for over 15 years now. When I started my rent was only 50 cents per square foot (3000sf). Today my rent is up to $2 per square foot ($6000/mo). That's an increase of $4500 in just 15 years. Had I bought my own building back then my payment today would probably be less than $2500/mo. As they say, hind sight is 20/20!

[waitingforgodot]

I have great respect for Lou Barnes because he knows more than I do, and makes inisghtful remarks quite often. Read Cal's first paragraph -- Barnes' version of a bailout would be the worst nightmare for most people on this blog.

Btw, he's smart, but he ain't that smart and he's no prophet. I recall an npr interview in 2005ish in which he argued that there was no bubble.