EXOTIC MORTGAGES: THE CRISIS YET TO COME

Mr. President, with all due respect, when it comes to our mortgage crisis, you really see only the small tip of a very large, nasty iceberg and your $50M proposal proves it. There's another wave of financing failures out there that really can be prevented.

Let's do it this way: Here are two real homeowning families, both current on their mortgages and yet both in desperate trouble. These house holds make about $80K (assuming they keep their jobs) and are well employed. In 2005 and 2006, respectively they bought $200K houses--well within the recommendation by budgeteers that your home should cost no more than 2.5 years of your income. One got a ten year balloon mortgage with a four year ARM. His payments have been $870.00/mo. In May the will go to a few pennies under $2000.00. The other guy was sold the worst possible mortgage vehicle, An interest-only double ARM. Of course the argument for the Interest Only vehicle was that the property would go up in value and the buyer could use the "profit" for a flip or a takeout. He has adjusted once, from $1100. to $2000.00. He will adjust again in September to God Knows What and, despite being current with every dime he has been required to pay he has paid not a cent of equity toward his "ownership" in the Home.

These are such good citizens that they have maintined their obligations to the lendors. They're not behind. They are not "jeopardy" cases by anyone's standards right now. Both homes are now worth about $160K. Both homeowners would hang onto the properties if a conventional mortgage were available as a takeout. They would then either take their punishment at the tail end of their ownership (when they would have some equity, even at the lower price) or get saved by another upward readjustment in the Real Estate market. Either option would be sustainable. In fact, even if the FMV of the homes dropped lower in, say 15 years, the diminution would be sustainable, so long as the mortgage payment was in the 35% range of the household's income.

The legislation proposed would not help these good people at all or in time. A guaranteed takeout loan program is a great idea. One that only helps people (and I mean no criticism of them) who aren't paying per their agreement but ignores compliant but completely screwed homeowners is an abomination. Make the program available to everyone who (1) has an exotic mortgage they can no longer wheel because of the ARM provisions, (2) Who have lost, through death or the economy more than a third of their income or (3) to anyone with sufficient income to make reasonable mortgage payments whose underlying residential real estate has lost more than 15 % of its FMV.

The program would work pretty much like the old student loan program. The Gov't would not have to put up any money on the front end, just guarantee the loans. Defaults would be handled by the bank and the government would simply insure the shortfall if any.

Mr. President, this is pretty much what you were describing yesterday, except you seem to leave out the compliant people who are in need of a takeout and need it because of what has ocurred in the Real Estate Market and/or because of the goofy exotic they were sold.

In other words, if you're going to have a program at all, don't exclude the people who have behaved most honorably and responsibly once they stupidly signed on the dotted line. It is not only the right thing to do but the only way to avoid a secondary collapse of the Home Market.

Bloghost's Note: Yes, I have criticized folks in exotics for not seeking counsel before signing the most important documents of their lives. I don't back away from that. Still, the new program would take out recklessly uncounseled people who are underperforming. The rationale for not taking out recklessly uncounseled people who are in fact performing escapes me. The signature is the stupid act. Rescuing people who did the stupid act and then failed to live with their bargain and not rescuing those who did the stupid act and then lived honorably with their burden looks first like rewarding some who chose to make themselves victims, twice, and a failure to acknowledge that the Real Estate market needs funded buyers to effectively redefine itself (the best buyer being someone who actually pays).