Little Hope For Hope Now Alliance

The details of the Hope Now Alliance mortgage bailout plan are finally in. Let's take a look at those who are eligible to be helped.

Eligibility Pool

• First lien owner occupied residential adjustable rate loans (ARMS) with initial fixed rate for 36 months or less.
• Must be originated between 1/1/05 and 7/31/07 and included in securitized pools with reset date between 1/1/08 and 7/31/10.
• The loan must be current. Current means not more than 30 days delinquent and not more than one 60 days delinquent in last 12 months.
• Loan to value must be GREATER than 97%. [Mish note: This line was revised. It originally said LESS than 97%]
  
• FICO Score must be less than 660.
• FICO score cannot be more than 10% higher than origination.
• Servicer must determine that owner cannot afford higher payments.

White House Announcement

Those wishing to hear what President Bush has to say can tune in to President Bush Discusses Housing. Here is a pertinent snip.

HOPE NOW members have agreed on a set of industry-wide standards to provide relief to these borrowers in one of three ways: by refinancing an existing loan into a new private mortgage, by moving them into an FHA Secure loan, or by freezing their current interest rate for five years.

Lenders are already refinancing and modifying mortgages on a case-by-case basis. With this systematic approach, HOPE NOW will be able to help large groups of homeowners all at once. This will bring more relief to more homeowners more quickly. HOPE NOW estimates there are up to 1.2 million American homeowners who could be eligible for this assistance.

And I have a message for every homeowner worried about rising mortgage payments: The best you can do for your family is to call 1-800-995-HOPE.

In April 2006, I sent Congress an FHA modernization bill. This bill would increase access to FHA-insured loans by lowering down payment requirements, allowing the FHA to insure bigger mortgages in high-cost states, and expanding FHA's authority to price insurance fairly, with risk-based premiums. This bill could allow the FHA to reach an additional 250,000 families who could not otherwise qualify for prime-rate financing. Last year, the House passed the bill with more than 400 votes -- and this year, the House passed it again. Yet the Senate has not acted. The liquidity and stability that FHA provides the market are needed more than ever -- and I urge the United States Senate to move as quickly as possible on this important piece of legislation.

My Comment: I urge everyone to write their Senators and urge them to stop such political pandering. Low or now down payments are exactly one of the problems behind the mess we are in. Note that "Hope Now" does not even apply to those with less than 3% equity. Now Bush is proposing we take an additional 250,000 subprime borrowers and at taxpayer expense offer them prime loans with low down payments. How can this possibly make any sense?

Second, Congress needs to temporarily reform the tax code to help homeowners refinance during this time of housing market stress. Under current law, if the value of your house declines and your bank forgives a portion of your mortgage, the tax code treats the amount forgiven as taxable income. When you're worried about making your payments, higher taxes are the last thing you need. The House agrees, and recently passed this relief with bipartisan support. Yet the Senate has not responded. This simple reform could help many American homeowners in an hour of need -- and the Senate should pass it as soon as possible.

My Comment: The consequences of this proposal are certainly not what the President has in mind. This provision would allow borrowers to hand over the keys scot free without tax liability. It would increase REOs and foreclosures.

Changing the tax code can also help state and local government do their part to help homeowners. Under current law, cities and states can issue tax-exempt bonds to finance new mortgages for first-time home buyers. My administration has proposed allowing cities and states to issue these tax-exempt mortgage bonds for an additional purpose: to refinance existing loans. This temporary measure would make it easier for state housing authorities to help troubled borrowers -- and Congress should approve it quickly.

My Comment: Once again someone has to pay for this. That someone is taxpayers. I urge Congress to not pass this provision either.

Third, Congress needs to pass funding to support mortgage counseling. Non-profit groups like NeighborWorks provides essential service by helping homeowners find affordable mortgage solutions and prevent foreclosures. My budget requests nearly $120 million for NeighborWorks and another $50 million for HUD's mortgage counseling programs. Congress has had these requests since February, yet it has not sent me a bill -- and they need to get the funding to my desk.

My Comment: Congress needs to do no such thing. What Congress needs to do is stop meddling in the free markets.

Has anything changed?

Now that the details are finally in, has anything really changed? Let's take a look.

In Paulson's Plan Is Nothing But Lip Service I stated:

The plan will fail because it is in the best interest of those underwater on their loans to make it fail. This is what happens when borrowers have no skin in the game. Hoards of people borrowed money with 0% down. If they had 20% down or even 10% down they would be reluctant to walk away from that loss. Instead, borrowers have a chance to walk away debt free after being 10's or even 100's of thousands of dollars underwater. Who in their right mind would not want to jump on that?

Oddly enough, the new IRS plan to not tax homeowners on forgiven debt actually encourages homeowners to walk away.

I now see that only the House passed the forgiveness provision so it is not yet law. Passing that provision will make it more tempting to hand over the keys, but for those deep in the hole with little down payment the temptation is pretty strong already, even with a tax liability.

Previously I suggested and many others did too, that borrowers would have an incentive to purposely get behind on payments to prove they need help. However, provisions that the loan be current and the FICO score be within 10% of origination, removes most of the gamemanship possibilities from the homeowner.

There is still a problem with a "Lawyers' Free-for-All" and there are still negative implications for Fannie and Freddie as discussed in Paulson Strikes Out.

To address the "Lawyers' Free-for-All", Hillary Clinton and President Bush both want Congress to pass a safe harbor act to protect servicers from lawsuits. However, I believe such a proposal is unconstitutional and said so in Hillary Clinton and George Bush: Two of a Kind.

So other than correcting the ability to game the system, the main thing that has changed from when discussion ideas were first proposed are the eligibility requirements. Those requirements seem rather strict. Very few seem to benefit.

Who will be helped?

Newsday.com is writing Bush mortgage plan could help some.

A few hundred thousand homeowners will likely find relief in the Bush administration's plan to freeze interest rates, but more than a million struggling borrowers won't. In announcing the plan Thursday, administration officials acknowledged that the plan is not "a silver bullet," but said it is a significant step to addressing the credit crisis.

Industry observers, however, said the proposal will only help a handful of borrowers in trouble because of its strict eligibility criteria. Estimates range from 7 percent of subprime borrowers, or about 145,000 people, to 12 percent, or about 240,000 people. On top of that, servicers' participation in the program is voluntary. And, investors who bought securities based on subprime mortgages, may not sit back quietly after learning their interest payments won't rise anytime soon.

"This is a small portion of the estimated 2 million borrowers looking at foreclosure over the next couple of years," said Keith Ernst, senior policy counsel at the Center for Responsible Lending, which expects the plan to help 7 percent of homeowners with subprime mortgages.

The Mortgage Meltdown

Let's now consider Herb Greenberg's column, Straight Talk on the Mortgage Mess from an Insider. Here are a couple of snips from a fantastic column. I recommend everyone read the entire piece:

What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

How are the banks going to get this junk second mortgage paper off their books?

Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them. Not considering every Option ARM a sub-prime loan is a mistake.

Conclusion

Now that the details are finalized, we can clearly see that very few people percentage wise will be helped by this bailout proposal. The real damage lies ahead with pay option arms, Alt-A, and second mortgages.

See Housing - The Worst Is Yet To Come and When Will Housing Bottom? for graphs that show how little help the president's plan will provide in the grand scheme of things.

Addendum:
Loan to value must be GREATER than 97%. I originally said LESS than 97%. This is a material change which means that even fewer benefit. An explanation of the consequences can be found in Hope Is Now a Sucker Trap.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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