Senator Obama's plan to end the Mortgage Crisis

[Coexist]

from the Washington Post

First, he would enact a comprehensive plan to help bring an end to the foreclosure crisis that threatens millions of families. Obama supports efforts to create a new FHA Housing Security Program to provide significant incentives and guarantees for lenders to buy out mortgages that exceed the value of homes and convert them into stable 30-year fixed-rate mortgages that homeowners can afford. This is a responsible plan designed to help responsible homeowners without rewarding borrowers or investors who helped create the problem by gambling recklessly or committing fraud, and it asks both sides to contribute to the solution.

Obama would couple this plan with a direct interest-rate subsidy for low- and middle-income borrowers patterned on the mortgage interest deduction now predominantly used by high-income itemizers, as well as with comprehensive credit counseling, additional aid for loan workouts and reform of the bankruptcy code.

A housing security program would help not just the families and neighborhoods threatened by foreclosure. It would also remove the darkest cloud hanging over the financial system. Resolving this issue would ease the financial crisis and get credit markets lending again.


Obama's third priority is making sure that a housing crisis like this does not happen again. That means ensuring that we don't reward people -- whether borrowers, lenders or corporate executives -- for bad behavior in the mortgage market. It means installing the responsible oversight of credit markets that has been lacking -- on mortgages, yes, but also on credit cards, which threaten to metastasize into the next version of the mortgage crisis. It also means increasing people's savings so they have something to fall back on when things go wrong; enacting his long-run savings program would give virtually every worker in America a portable pension savings account.

-- Austan Goolsbee

My family was just discussing this issue at our dinner yesterday, and we were wondering how the government would handle this - rewarding irresponsible lenders at the cost of homeowners? With such a delicate balance - what could possibly work. Well, I think this is brilliant.

[DangerDave921]

1. 3rd priority

If we tighten lending requirements, then we're soon going to hear the oft-repeated lament that poor people/women/people of color aren't getting qualified for loans. Remember that? So the industry will ease restrictions, gradually start lending money to less-than-qualified people, and we'll be back in the same boat in a few years.

[Coexist]

2. I disagree

the current crisis is not due to giving poor people loans, there are plenty of middle and upper income people who got interest only and ARM loans for overvalued houses.

[DangerDave921]

3. Not poor

I didn't mean poor people per se; I meant people getting approved for loans that were out of their reach financially. Could apply to middle-class folks too.

[Coexist]

6. if banks can be prevented from loaning

350,000 for a home that is valued at 275,000, it will help. Interest only loans should be illegal, I cannot understand the logic behind them, they remind of the balloon payment loans that convinced people they could afford a home they couldn't.

[DangerDave921]

13. Confused

How can a mortgage company loan 350 on a house valued at 275? The mortgage company loans what the purchase price of the house is. If the house is selling for 350, then the house is valued at 350. Am I missing something?

The logic behind interest only loans is that the monthly payments are lower. This entices people to borrow more than they otherwise could afford. I don't think they should be illegal (after all it is a mutually agreed-upon contract) but there have to be clear rules on spelling out to the borrower exactly what this means. Borrowers need information on these risky loans. Of course some people have this information and decide to take the risk anyway.

[Coexist]

17. when we sold a home about 8 years ago,

the market was hot in the that neighborhood, and although appraised at (lets say) 100,000, there was a bidding war, and a couple was willing to pay 150,000 for the home. In the past, the bank would require they borrowers to pony up the 50,000 and they would lend the 100,000. The borrower was betting that the home would increase its value to above 150,000.

Their lender didn't even require them to put 10% down. They put 3% down and the bank loaned them the rest. More than the appraisal, much more than the tax bill appraisal. Someone signed off on it, based on the hot market.

This is why people are complaining about irresponsible lending. Yes, borrowers took the money - but who knows more about mortgages, lenders or borrowers?

They had one friend of mine (a single mom) convinced she could afford a townhome, and she showed me the numbers. I said, "what about escrow, that's not listed, are you paying the insurance and taxes yearly or quarterly yourself, and how are you making sure you have that money put aside?" She thought it was already worked into the mortgage. I explained that it was not, and my husband worked out the numbers for here, it would add another $300 to the monthly payment. She could not afford that. The realtor was deliberately misleading her, and had she not come over, she would have signed a contract on the townhome.

[Tatiana]

28. That's it in a nutshell.

Same thing happened with a house on my block. Down the road, they put up two spanking new subdivisions. Well, this was when the market was hot. There are more than a few McMansions in that subdivision, but because of that new construction, property values started going up. A neighbor sold his corner lot property, cashing out on the hot market. They had purchased that home around the same time I purchased mine (6 years ago or so). I remember because that was one of the open houses I visited. At the time, the asking price ($160,000) was over my budget. It's a three-bedroom ranch with 1 1/2 baths. It sold for $162,000 if I recall 6 years ago.

Not a year after I closed on my house, there was a "For Sale" sign in the yard. I checked the listing on realtor.com and saw the asking price had jumped to $190,000. $190,000 just one year after the house sold for $162,000! There was no pool. No extensive landscaping or work (I did visit a showing of the house just to see what improvements were made that would justify such an increase in selling price.). You know what? The house ended up selling for $191,000.

Five years later (present day), there is another "For Sale" sign in the yard of that same house along with dozens of other "For Sale" signs that pepper the front lawns of those subdivision homes. The bank has foreclosed on the home. The asking price now? $140,000.

So what has happened, in fact, is that the actual value of the home has gone DOWN from the fair appraisal selling price of $162,000. Many of my neighbors are concerned about the increasing number of foreclosures in the area. This truly is an enormous crisis.

[leftofcool]

15. Interest only loans work to the advantage of some of us

They are great if you know you can pay something off in a year.

[mucifer]

4. Hey stop talking about issues! I want to know more about pastors.

Geez!

[SoCalDem]

5. Part of the plan is a return to the way things used to be

People need to QUALIFY for homeownership.. It's just as simple as that..

EVERYONE wants to own their own home, but folks.. you never OWN the home until you OWN it..as in make the LAST payment.. Until that payment, you are RENTING it from the lender, and any equity "you" have built up within the loan terms is technically "yours" but if you start removing it and the values drop, you are truly SCREWED....so NO equity loans for the first 10 years of the loan..and only 1 per decade..and never more than 20% of the equity..

We have to go back to minimum down-payments of at least 10% (it used to be 30%)..and that down payment CANNOT be borrowed.. and buyers should be able to provide at least 5 years' worth of tax returns to PROVE they have sufficient income

I know this will sound un-PC, but if you want to really be sure you can "afford" a home, finance it based on the highest income earner in the family...alone..

People DO lose jobs in this crazy economy, and if you are barely making it with TWO income, what happens when you lose ONE of those incomes??

I would also like to see the IRS deduction limited to your occupied residence ONLY..and no deduction of interest for people grossing over 300K.. or of a home currently valued at more than 500K..whichever is higher

If you want to speculate and become a rental czar, then those properties should be treated entirely differently as any other business venture would be...

[Coexist]

7. I agree on the rental property issue

those should be treated differently than a primary residence.

[leftofcool]

8. I agree except for

the IRS deduction for your residence only. We own two homes. We still pay property taxes and insurance and libality insurance and mortgage payments on the one we don't live in. We should be able to deduct that from our taxes. We have it rented and we have to claim the rent as income so why should be not claim it as a deduction?

[Coexist]

11. I don't think the poster is saying you can't deduct anything on it

there is still depreciation on any appliances, new roofing, etc. But I think a primary residence, a home that you live in, should be treated differentl than an income source, a business venture.

[SoCalDem]

12. It should be considered a business, and if those rules allow for deductions, fine..

and they probably do :)

I just think that "flipping" and scavenging for cheap properties & then writing off all the expenses, is hurting ordinary people's ability to buy entry level housing..and driving up costs

[leftofcool]

14. I see what you mean

yea, IRS makes us show it as a business. I didn't know there was a choice.

[ThatBozGuy]

10. My wife worked as a temp in a banking system in 2005, They were underwriting loans to people that ..

Didnt even have REAL social security numbers and income levels like 30 thousand a year on 250 thousand dollar house loans.

The lenders are very guilty in this. There was almost no qualifying whatsoever. It is no surprise we are here.

I think Mr Obama has a lot of good direction on starting to get it straightened out.

[Vinca]

9. Sounds like a sensible plan - the best solution I've heard yet. nt

[BumRushDaShow]

16. Houses should not be commodities...

Part of the problem is the rampant speculation that was permitted to happen. This inturn shot the prices up in many areas of the country to the point where the average person couldn't afford the house.... prompting them to turn to the exotic mortgages in order to buy in areas that were at least within commuting distance of their jobs.

Somehow, the so-called "free market" economy needs to be reigned in so this type of thing doesn't happen again.

[DangerDave921]

18. If not commodities, what?

Should houses be distributed like loaves of bread to the poor? I'm not sure what you're driving at.

A house is a good, like any other good. They are built, bought, and sold.

[QC]

19. Sounds like a bailout.

A lot of people bought places they could not afford using mortgages that no sane person would sign up for. Why should those of us who cannot buy houses at all bail them out?

Nobody ever wanted a house more than I do, but I have not bought one because I knew I could not afford it. Now it looks like I should have just signed up for a suicide mortgage on an ostentatious McMansion at ten times my income and waited for the bailout.

[rug]

20. It is for the banks too.

[QC]

21. Yep, a bailout for banks and for

buyers who wouldn't settle for something modest and affordable on a 30-year fixed and instead bought something wildly overpriced on an 80/20 ARM.

Meanwhile responsible people get screwed again.

[wileedog]

23. WHile your busy making sure everyone gets their comeuppance

People who may not have known any better go homeless and the banks get a house they don't want and can't sell in this market. And they more of these houses they get, the more go on the market dragging everything down further, which even hurts the sensible people.

There is a difference between a true bailout and finding a compromise that benefits everyone.

[Coexist]

22. so what do you think should be done?

[QC]

25. Jail the con artists (like Mozilo), re-regulate the mortgage industry,

refinance the genuinely deserving (the defrauded) and let the greedy sink.

[JTFrog]

24. Contrast with Hillary's idea to be announced today:

http://www.reuters.com/article/politicsNews/idUSN2430663920080324

Clinton proposes Greenspan lead foreclosure group

Mon Mar 24, 2008 9:29am EDT

By Jeff Mason

WHITE PLAINS, New York (Reuters) - Former Federal Reserve Chairman Alan Greenspan and other economic experts should determine whether the U.S. government needs to buy up homes to stem the country's housing crisis, Democratic presidential candidate Hillary Clinton will propose on Monday.

Clinton, a presidential candidate and senator from New York, said the Federal Housing Administration should "stand ready" to buy, restructure and resell failed mortgages to strengthen the ailing U.S. economy.

"Just as it has in the past, this kind of temporary measure by the government could give our economy the boost it needs and families the help they need," Clinton will say, according to excerpts of remarks prepared for a speech in Philadelphia.

Another DUer put it best; That's akin to hiring Nero to be the fire inspector of Rome.

[Coexist]

39. Obama is lucky to have Volcker on his side

with stagflation 'acomin.

[Texas Hill Country]

26. As a person in the banking industry... you have NO IDEA how much this would cost. None.

[Coexist]

32. are you speaking to Senator Obama or me?

[redqueen]

33. Why not just put "... speaking as a person in the banking industry." in your sig.

;)

[BigDDem]

27. In addition...

just have Rezko buy the lot next door.

:rofl:

[high density]

29. I don't like what either of our candidates have to offer on this mortgage thing

What Obama has offered makes a bit more sense than Clinton's plan, but it's still not something I'm eager to see implemented. I just don't like to see the government rewarding bad behavior while those who were more fiscally responsible get no such assistance.

[TwilightGardener]

30. Kick--an actual thread about an actual issue.

[Coexist]

31. thanks -I prefer that Greenspan not be our saviour here

as he was part of the problem in the first place, was he not?

[Texas Hill Country]

34. Greenspan would increase investor confidence instantly, so it is a great idea

that is the number one issue in the market, especially the bond and mortgage derivative market. This is an incredibly intelligent move.

Regardless, the "task force" would actually amount to very little... Greenspan heading it would calm many fears.

[redqueen]

36. Are investors that stupid?

He was blatantly wrong on the housing bubble... repeatedly. Do they not pay attention?

[bridgit]

38. "irrational exuberance" was the catch all phrase for much of what followed...

and yeah, to the extent the investor class thinks money can be made while sitting on their ass they are that stupid

[redqueen]

35. The article which claims Hillary proposed that he be in the team is misleading at best.

Might even go so far as to call it a distortion or flat-out lie. The headline is horrendous.

[anamandujano]

37. Goolsbee? Doesn't he have a secret meeting somewhere?

He's copying Clinton again. She laid out her plan eons ago. Did it really take Goolsbee that long to reword it for Obama. They're slow.

[thoughtcrime1984]

40. Stronger gov't regulation of the banking industry is in order

The "bail-out" of the banks, as much as I don't like it, would seem to be necessary. What would the ramifications be if Americans' confidence in the banking industry drops significantly? Could there be folks pulling money out in massive numbers? But, there must be greater control over lending practices to ensure that never happens again. What exactly, I am not sure, but the days of record profits across the board in all sectors needs to be slowed a bit, as it seems to be coming directly out of the pockets of the lower and middle class citizens. The golden goose is being killed, so corporations, including banks, need to look at a much broader horizon to ensure that there will always be a viable customer base. Temper expectations, lower the bar a little so that average people can still be of some use to the economy.

[Coexist]

43. I just hope the rabid de-regulators have woken up a little.

[OzarkDem]

41. Needs more than that, and soon

Kudo's to Clinton for having the guts to push for a bipartisan commission to study the problem and see how they can make Frank & Dodd's bill work...

The question that need to be answered are "how much will it cost" "who pays for it" and depending on the choice of who funds the bailout, "what are the collateral affects"?

She's doing what real leaders do - wade into the problem and start finding a solution before it gets out of hand.

[Coexist]

42. yeah, she's an American original...

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x5232917