Wednesday, January 25, 2012

State Of The Union: Housing Program Preview

I watched all of the State Of The Union last night.  Well, I read it when the transcript was complete and I listened to Obama read it in the background while I worked on another project.

The part of the speech I was interested in: details on the new housing program that is in the works as part of the "Re-Elect Obama 2012" campaign.

We got a few details, and the following were the key paragraphs from the speech:

"And while Government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief.

That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.

Let’s never forget: Millions of Americans who work hard and play by the rules every day deserve a Government and a financial system that do the same. It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody."


This is part one of the program I was expecting.  I believe there are two more parts coming (a REO to rental program, which I discussed back on January 10 in Federal Housing Program: Renting Foreclosures, and a mortgage settlement agreement for the robo-signing scandal (which I will discuss when announced).

3 Step Re-Elect Obama Housing Program:
1. Mortgage Write Downs
2. REO Rental Progam
3. Mortgage Fraud Settlement

While I praised the REO to rental program, I am almost certain, based on rumors I am hearing, that the mortgage fraud settle agreement will be a disaster, and it appears this homeowner write down program announced last night will be the same.

There are currently 22 million homeowners underwater based on data from Corelogic.  The total underwater debt today stands at $750 billion (prices continue to fall month after month).

The plan, based on loose information released, is to take underwater mortgages held by Fannie Mae, Freddie Mac, hedge funds, large banks, and foreign banks and write them down to their current value.

When a mortgage is written down, let's say from $400,000 to $300,000, someone has to pay that $100,000.  The plan is to have the FHA take the loss as the banks and hedge funds would be paid in full.
The FHA means tax payers.  It is a back door bank bailout.

Obama says the plan will cost tax payers $10 billion.  With $750 billion in underwater mortgages, I am having trouble understanding the math.

The regulator for Fannie and Freddie, the FHFA sent a letter on Friday saying:

"It has determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default. Principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure.

Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action."

There is nothing quite like the insanity of an election year.  The good news is that $750 billion paid out by tax payers (added to the deficit and purchased by the Federal Reserve's printing press) should be nothing but warm music to those holding precious metals.


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