Should Obama slash debt of struggling homeowners?

Today President Barack Obama signed a $787 billion bill to boost the sagging economy, but some housing watchers are more interested to hear what he has to say Wednesday, when he is expected to provide details of a $50 billion proposal to help homeowners avoid foreclosure.

Some experts say the only way to dramatically reduce foreclosures is for government to use taxpayer funds to reduce the amount struggling homeowners owe to the bank.

Jack Kyser, chief economist of the Los Angeles County Economic Development Corp., which also tracks O.C., said borrowers who owe more than their home is worth face a “psychological barrier” to keeping up their payments.

Up to now, loan modification programs have temporarily reduced monthly payments for borrowers while keeping the total debt intact. Kyser said those modifications have a high rate of failure. Indeed, govenment data shows many loans modified in the first quarter of 2008 went back into default within five to six months.

However, the idea of giving people a break on their debt strikes some as a “moral hazard” — people are being rewarded for bad behavior (buying more home than they could afford) and will do so again unless they are punished.

But Kyser said homeowners who miss payments suffer a loss in their credit scores and so will pay more in interest the next time they borrower money to buy a home or car, if they can get credit at all.

“They will be punished sooner or later,” Kyser said.

What do you think?

How Obama would change bankruptcy law for mortgages

In all the hoopla yesterday over President Barack Obama’s plan to provide up to $75 billion in mortgage aid, there wasn’t a lot of attention to a line in his strategic plan about giving bankruptcy judges the power to modify home loans, including a reduction in the balance owed to current market value of the property. Such a change requires a vote by Congress. Sounds Good but lets see how that goes once congress gets a hold of it..

National Mortgage News has a few more details:

President Barack Obama is endorsing changes to the bankruptcy code that will allow judges to modify mortgages that were made in the “past few years” and don’t exceed the $417,000 conforming loan limit, according to the president’s foreclosure prevention plan. “This provision will apply only to existing mortgages under the Fannie Mae and Freddie Mac conforming loan limits, so that millionaire homes don’t clog the bankruptcy courts,” the summary says. The bankruptcy legislation being proposed by the president is designed to help families that have “run out of other options.” But they must certify that they tried to get a loan modification and worked with a servicer before filing for bankruptcy. The legislation also provides authority for the Federal Housing Administration and the Department of Veterans Affairs to pay partial claims in the event of a bankruptcy or loan modification “so the holders of loans guaranteed by FHA and VA are not disadvantaged.”
February 19th, 2009, 8:07 am . posted by Mathew Padilla, Reporter

What other Financial Crisis Tell US

The attached article is perhaps the most informative I’ve read regarding our economy and what we can learn from other financial crises our country has faced in the past. It was written by Carmen Reinhart, a professor of economics at the University of Maryland and Kenneth Rogoff, a professor of economics at Harvard and former chief economist at the International Monetary Fund.

Below are a few of the highlights:

·Negative growth episodes, like we are experiencing, typically last just 2 years. This should end by September 2010 if history repeats itself.

·Housing typically falls 36% which means we may have another 8 -10% to go from current levels.

·Equity prices historically fall 55% in roughly 3 ½ years and could take another 2 years to have a sustainable rebound.

·Unemployment is likely to worsen for another 2 years and could mean double digits are reached.

The article goes into much more details than my summary above and is worth reading in full.
When asked about your view of the economy, this is a good article to send as a thoughtful and historical review comparing past “crises” to this one.

The other message is less obvious but arguably more important. Our economy will recover. Curtailing your spending as a client or prospect certainly is understandable but should be combined with a commensurate increase in saving.

Full Article