House Much Did You Say That Is?

Don’t believe the naysayers
who pooh-pooh the idea that the The Homeowner Affordability and Stability Plan will only help a small fraction of California homeowners:
the data on that is not even readily available. However, the median
home price in California a year ago was under $600,000.

Under the federal
plan, those who owe less than or equal to $729,750 on their first mortgage,
and are suffering financial problems on a mortgage secured by or before
January 1, 2009, are basically eligible. Does it make sense that in
a state with a median home value well under $729,750, only a small fraction
of homeowners would benefit? Didn’t think so. Let’s take a look
at some of the facets of the mortgage news of today, and see if the
federal relief programs will actually help Californians.

The Homeowner Affordability
and Stability Plan signed into law by President Obama stipulated that
some homeowners could borrow more than 100 percent on the value of their homes,
to up to 105 percent. According to CNN, more than 27 percent of homeowners are “underwater,”
or owe more for their home, than the price at which the home was actually
valued. The loan modification program is geared toward those homeowners.

The objective of this plan is “to provide creditworthy borrowers who
have shown a commitment to paying their mortgage with affordable payments
that are sustainable for the life of the loan.” In his March 7 radio
address, Gov. Schwarzenegger stated that in California,
“new data shows more than 136,000 loan modifications occurred throughout
California in 2008,” though there still remains “the threat of foreclosure
[which] still looms over thousands of California families and risks
our economic recovery.”

According to the White House blog, “Eligible loans will now include those where the new first mortgage
(including any refinancing costs) will not exceed 105% of the current
market value of the property. For example, if your property is worth
$200,000 but you owe $210,000 or less you may qualify. The current value
of your property will be determined after you apply to refinance.”
Under the plan, the renegotiated mortgages will last a “30 or 15 year
term with a fixed interest rate.”

Some early reports have questioned
how helpful this loan program actually could be. Those who owe significantly
more than the loan they took out, are classified as being “underwater”
in debt-terminology. It may appear that with home value decreasing
in California, such a proposal should benefit the majority; however,
this mortgage modification program refers to the prices at which homes
were bought, many of which were purchased when home prices were significantly
higher than their current value.

Some of these same borrowers (at the
present time, the date is not widely available) may well accrue well
more than 5 percent of additional debt above the loans first secured. Welcome
to the bloated and overpriced housing market of California.

According to the FDIC, the
Treasury will be spending “up to $50 billion dollars to make mortgage
payments affordable and sustainable for middle-income American families
that are at risk of foreclosure. Borrowers who are delinquent on the
mortgage for their primary residence and borrowers who, due to a loss
of income or increase in expenses, are struggling to keep their payments
current may be eligible for a loan modification.” The FDIC statement
further went to acknowledge a partnership with the Treasury, HUD and
“other federal agencies” to get the “massive program” officially
running by March 4.

Visiting FinancialStability.gov,
the visitor is presented with an offer of snake-oil salesman quality,
encouraging homeowners to peek in, and find out if the new bill and
loan modification plan will help them:

If you can no longer afford
to make your monthly loan payments, either because your interest rate
has increased or you have less income or you are experiencing a hardship
that has increased your expenses (like medical bills), you may qualify
for a loan modification to make your monthly mortgage payment more affordable.
Millions of borrowers who are current, but having difficulty making
their payments and borrowers who have already missed one or more payments
may be eligible.

Visitors are asked to consider
four questions to find out if they are qualified for a “Home Affordable
Modification”:

  1. “Is your home
    your primary residence?
  2. Is the amount you
    owe on your first mortgage equal to or less than $729,750?
  3. Are you having trouble
    paying your mortgage? For example, have you had a significant increase
    in your mortgage payment OR reduction in your income since you
    got your current loan OR have you suffered a hardship that has
    increased your expenses (like medical bills)?
  4. Did you get your
    current mortgage before January 1, 2009?”

The lucky visitor who answers
yes to all of the above, is invited to click a beckoning green button
to find out more. Entering, visitors are instructed to pull out the
necessary documentation, then “call your mortgage servicer and ask
to be considered for a Home Affordable Modification. The number is on
your monthly mortgage bill or coupon book.”

(Does anyone feel bad for the
mortgage companies being told what to? Don’t. According to the Treasury,
those who comply and succeed, will “receive an up-front fee of $1,000
for each eligible modification meeting guidelines established under
this initiative. They will also receive ‘pay for success’
fees — awarded monthly as long as the borrower stays current on the
loan — of up to $1,000 each year for three years.”)

Funny thing is, there is finally
some transparency, but it is found only after a nice, long search. On
the FinancialStability.gov website, those homeowners who must click
the foreboding “other options” button are finally treated to a clear
answer: No, “the plan will not help everyone.” That’s right, you
heard it here: the universal bailout, paid for by taxpayers, is not
in fact, designed to help all of the same taxpayers. If that wasn’t
juicy enough, the statement goes on to explain that the plan “is not
designed to reduce mortgage balances for borrowers who have sufficient
income to make their mortgage payments but owe more than their homes
are worth. It also will not help investor borrowers or borrowers who
have no income and cannot make any mortgage payment.”

According to the Treasury,
the reasoning behind the Homeowner Affordability and Stability Plan
is threefold: 1.) To refinance up to 4 – 5 million “responsible
homeowners to make their mortgages more affordable;” 2.) To provide
a “$75 billion homeowner stability initiative to reach up to 3 –
4 million at-risk homeowners;” 3.) To support lowered mortgage rates
by “strengthening confidence in Fannie Mae and Freddie Mac.” The
Treasury also alleges in its support of the bill, that “each foreclosed
home reduces nearby property values by as much as 9 percent.” Supporting
examples were not available. And the controversial possibility of allowing
judges to reinvent history by changing mortgage deals, is still on the
table with this plan.

Many Californians purchased
homes before the housing bubble burst, at which point the median home
price was well over $500,000, nearly $600,000. However, that is still
less than $729,750. According to California Governor Arnold Schwarzenegger,
California has been working to battle mortgages woes in a number of
ways, including a “voluntary agreement with major lenders to freeze
interest rates for homeowners most at-risk to foreclosure.”

And just some of the prerequisites
to qualifying for the loan modification include having a home debt of
less than or equal to $729,750 or less (which, interestingly, is now
the standard rate as applied for extremely affluent areas, though previous
applied maximum caps nestled closer to $400,000), and having a mortgage
payment exceeding 31 percent of monthly income.

By the way, some of those disqualified
from the loan re-finagling include those who lost their jobs, those
who invested in homes in which they do not live (kind of shutting the
door on investing, eh?) and those who owe mortgages above threshold
of $729,750, also known as “Loan Limits for Conventional Mortgages.”
As provided by eFannieMae, 2008’s loan limits ran, for a single-family
home, from about $415,000 to over $600,000, though those limits were
later “temporarily” raised to the new limits of today.

This will exclude those who
purchased homes in areas in which there is, or at one point was, a high
demand and extremely high housing prices. The California housing market
still contains some of the highest-priced homes in the country. According
to DQ real estate news, within one year, from January 2008 – January
2009, the median price of a home in the Bay Area dropped to just under
$300,000 from a previous high of about $550,000. CAR, in a recent news
release, also noted that the average price of “an existing home”
fell by 40.5%, to the median price of $254,350. This, in tandem with
the news of California’s housing market semi-rally in January with
the reported selling of over 600,000 homes which was 100.8 percent higher
than it had been one year before.

Say you bought a home and took
out a mortgage a few years ago, of over $800,000, just so you could
buy that middle-sized home in the excellent school district: you don’t
quality for this program. In Southern California, there was just as
dramatic of a shift, with a one-year drop of just over $400,000 as the
median home price, to about $250,000. Those who purchased homes in areas
such as Santa Barbara, which the CAR has variously listed as one of
the most expensive cities in which to live (with a median home price
closer to $1,000,000 than the statewide average of about half that amount)
are not exactly the target audience of the new mortgage relief programs.
Then again, if someone was able to purchase such a home, they most likely
have the assets to secure such a home already.

Between the dangers of the
inflated and unadjusted Alternative Minimum Tax (as indexed according
to property tax rates) and a federal stimulus plan that may help less
than 10 percent of mortgage holders in California (according to the LA Times),
the state housing market has yet to change significantly for the better
at this point of mid-March 2009, though the bottom may not be far away;
the signs are there, but not all of the pieces of the puzzle are in
place yet.

Commissioner Davi of the California
Department of Real Estate has noted that, “On some fronts, we have
turned the corner. Many of the issues that caused the crisis have abated,
either by market corrections or regulatory efforts. DRE investigations
revealed that stated income loans were used in the majority of cases
that involved fraud. Such loans have all but disappeared from the market
place.”

The CA Department of Real Estate has already prepared an “Advanced
Fee Agreement” template, for the purpose of facilitating “shortened
loan modification services.” Even if some Californians remain ineligible
to benefit off of the loan modification program, the state and new programs
are still offering rather generous assistance to those who can stand
to reap the benefits.