November 17, 2008
The end of financial responsibility
As the Democratically-controlled Congress, led by Pelosi and Reid, get ready to dump billions of dollars into the uncompetitive maws of the domestic automakers, more and more industries are queueing up, eager for their slice of the "free money" pie (ingredients: 100 percent taxpayer-funded pork).
This is, of course, your money being used to reward financially risky behavior, removing the corrective hand of the market from the economic tiller.
It leads to questions for those of us who have lived within our means, and The San Francisco Chronicle -- of all places! -- asks one that will have particular interest to most of us: "Are you an idiot to keep paying your mortgage?"
To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home's value. It's fine if you owe more than it's worth.
Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies.
If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment - including property taxes, insurance and association dues - to 38 percent of your gross income.
The reduction can be accomplished in one or more ways:
-- Reducing the interest rate, but not below 3 percent. (The new rate, if below market, goes back to a market rate after five years.)
-- Extending the term of the loan up to 40 years.
-- Reducing the principal on which monthly payments are calculated. Unpaid principal is added to the loan balance and due when the homeowner sells or refinances. The reduced interest payments never have to be repaid.
If you owe more than the home is worth, the plan will only reduce principal down to 100 percent of market value, according to an official for the Federal Housing Finance Agency, which supervises Fannie Mae and Freddie Mac.
If all three of these maneuvers can't reduce your payments to 38 percent of income, you won't get a fast-track modification but could still request a customized deal, says the official, who spoke on the condition of anonymity.
The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won't be expected to sell them to pay your mortgage.
Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.
"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."
The government is offering loan servicers $800 for every homeowner they get into the plan.
Schiff predicts that loan agents "will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan."
[...]
Risking your credit score for a lower rate "sounds like a game of chicken on the lending highway," says Craig Watts, a spokesman for Fair Isaac, which markets the FICO credit score.
A 90-day delinquency will hurt your score, but not as badly as a foreclosure. How many points it takes off depends on other things in your credit file, such as the number and severity of late payments on other accounts.
In the latest version of FICO, which is just being rolled out, "one isolated delinquency will do less damage to your score than it has in the past," Watts says.
Consumers who suffer a severe delinquency can rebuild their scores over time by paying all credit accounts on time and keeping their balances low.
"If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I'd be for keeping the home," Watts says. "Your score will bounce back."
Schiff predicts that many homeowners will reach that conclusion and that the new program will cost Fannie and Freddie far more than expected.
When money is about to be thrown -- hurled! -- at anyone willing to grab it, what justifies not partaking of this fiscal binge and purge ... other than the feeling in my gut that it's -- hmm, what's the word? -- wrong?
Do you get the feeling that folks who play by the rules are viewed as suckers and rubes? I'm beginning to feel like I'm the mark in a national game of Three Card Monte -- and everyone else is in on the scam, but me.
Posted by Mike Lief at November 17, 2008 06:54 AM
| TrackBack