Legal Commentary

Taking the Back of the Envelope to the Homeowner Bailout

By Professor University of Miami School of Law

The New York Times tells me that President Obama is proposing fifty billion to bailhelp out three million families who can’t make their mortgage payments. That works out to an average of $16,666.66 each. Let’s say we’re going to help cover two year’s payments - that’s $694.77 /month. Which sounds like a lot.

But if you borrowed, say, $250,000 at 10% for 30 years, your monthly payment is $2193.90.

Let’s imagine there’s an insurance piece here (and, to make it really easy, that it’s free and credible). Then our hypothetical borrower can refinance at the market rate of 5.27% (very optimistic, I know, given the likely credit history), lowering the monthly payment to $1383.61 Our hypothetical unemployed hard-luck case will still have to come up with $688.84 for the next two years, before the federal money runs out. Is that realistic?

I imagine one thing is that there’s going to be more focus on insurance to allow refinance and/or encourage banks to swallow a cramdown and less on monthlies?

Oh heck. Should have started by reading Calculated Risk. According to Obama Housing Plan, it’s $75 billion, and the NYT summary left out all the good details:

The plan contains two separate programs. One program is aimed at 4 to 5 million struggling homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to help them refinance their mortgages through the two institutions.

A separate program would potentially help 3 to 4 million homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participarting lender. Under this plan, the lender would voluntarily lower the interest rate and the government would provide subsidies to the lender.
…
Under the modification program which would involve government subsidies to lenders, lenders will be responsible for bringing down interest rates so that a borrower’s monthly mortgage payment is no more than 38% of their pre-tax income. After that the government program would match the amount reduced by the lender to bring a homeowner’s payments down to 31% of their pre-tax income.

And the money will come from stage two of the TARP Funds.

OK, that makes a little more sense. It will help people in the zone to be helped, but not the destitute. And there’s lots of vigorish for the banks/servicing companies to create an incentive to do workouts (right now the servicing companies to whom all this is outsourced make much more money on the foreclosure, which is part of the reason they don’t try real hard to do workouts).

[Update: I feel a little better noting that from the timestamps the Calculated Risk post wasn’t up when I took out the envelope…]

Full post as published by Discourse.net on February 18, 2009 (boomark / email).