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Are you an idiot to keep paying your mortgage?
Topic Started: Nov 17 2008, 05:01 AM (328 Views)
George K
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Finally
Are you an idiot to keep paying your mortgage?

Should you keep paying your mortgage?

If you have significant equity in your home, absolutely.

If you don't, it's getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.

Last week, the government announced a program that will substantially lower payments for many homeowners who have little or no equity, but only if they are at least 90 days delinquent.

Critics say the plan, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.

But what about the moral obligation to pay off a debt?

Elected officials have been chipping away at that by blaming the foreclosure crisis largely on predatory lenders. In a campaign fact sheet, President-elect Barack Obama says he "recognizes that the real victims in the subprime mortgage crisis are not the lenders, but the millions of borrowers who followed the rules and whose only crime was taking out mortgages that lenders told them they could afford."

Last year, Congress started removing some financial hazards of default when it passed a bill that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a short sale) or gets a loan modification that reduces the principal balance.

The tax waiver originally applied only to debt on a primary residence canceled in 2007, 2008 or 2009. Last month, in the bailout bill, Congress extended the waiver until 2013.

There are exceptions: The waiver applies only to debt that was used to buy or improve a primary residence. If you took out a home-equity loan or did a cash-out refinance to buy a car, you'll still owe tax on that debt if it is canceled. For state income taxes, California has partially conformed to the federal law, but only for debt canceled in 2007 or 2008. (For more details, see my April 24 column at www.sfgate.com/ZFJS.)

The Federal Housing Administration is offering two programs to help homeowners get more-affordable mortgages, FHA Secure and Help for Homeowners. Neither requires borrowers to be current on their payments.

The program announced Monday goes a step further by requiring homeowners to be late.

The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac and 27 loan servicers, promises to swiftly reduce payments for certain homeowners who appear to be on the verge of foreclosure.
How to qualify

To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home's value. It's fine if you owe more than it's worth.

Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies.

If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment - including property taxes, insurance and association dues - to 38 percent of your gross income.

The reduction can be accomplished in one or more ways:

-- Reducing the interest rate, but not below 3 percent. (The new rate, if below market, goes back to a market rate after five years.)

-- Extending the term of the loan up to 40 years.

-- Reducing the principal on which monthly payments are calculated. Unpaid principal is added to the loan balance and due when the homeowner sells or refinances. The reduced interest payments never have to be repaid.

If you owe more than the home is worth, the plan will only reduce principal down to 100 percent of market value, according to an official for the Federal Housing Finance Agency, which supervises Fannie Mae and Freddie Mac.

If all three of these maneuvers can't reduce your payments to 38 percent of income, you won't get a fast-track modification but could still request a customized deal, says the official, who spoke on the condition of anonymity.

The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won't be expected to sell them to pay your mortgage.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."

The government is offering loan servicers $800 for every homeowner they get into the plan.

Schiff predicts that loan agents "will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan."

To prevent fraud, the government says a borrower "must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification."

The housing agency official doubts that people will stop paying just to get a modification because it will hurt their credit record, and that will make it harder to get a loan and possibly a job.

"Credit bureau reports are checked by employers. They're taking a big risk missing three payments just to get a lower rate," she says. An existing lender who sees your credit score deteriorate could also cut back on your credit and possibly raise your rate.
Credit score impact

Risking your credit score for a lower rate "sounds like a game of chicken on the lending highway," says Craig Watts, a spokesman for Fair Isaac, which markets the FICO credit score.

A 90-day delinquency will hurt your score, but not as badly as a foreclosure. How many points it takes off depends on other things in your credit file, such as the number and severity of late payments on other accounts.

In the latest version of FICO, which is just being rolled out, "one isolated delinquency will do less damage to your score than it has in the past," Watts says.

Consumers who suffer a severe delinquency can rebuild their scores over time by paying all credit accounts on time and keeping their balances low.

"If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I'd be for keeping the home," Watts says. "Your score will bounce back."

Schiff predicts that many homeowners will reach that conclusion and that the new program will cost Fannie and Freddie far more than expected.

Although the mortgage giants are under a government conservatorship, the housing agency official says that any losses under the program will not be paid for by taxpayers unless Fannie and Freddie exhaust their reserves.
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QuirtEvans
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I Owe It All To John D'Oh
This is precisely what I've feared all along. We're rewarding people for making stupid decisions. We're giving them more house than they can afford, to save them the cost of dislocation. We're shielding them from market forces.

This is an awful idea. Forget the rest ... this is the real wealth redistribution.
It would be unwise to underestimate what large groups of ill-informed people acting together can achieve. -- John D'Oh, January 14, 2010.
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Mikhailoh
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If you want trouble, find yourself a redhead
George K
Nov 17 2008, 05:01 AM

Elected officials have been chipping away at that by blaming the foreclosure crisis largely on predatory lenders. In a campaign fact sheet, President-elect Barack Obama says he "recognizes that the real victims in the subprime mortgage crisis are not the lenders, but the millions of borrowers who followed the rules and whose only crime was taking out mortgages that lenders told them they could afford."

This is a very telling statement. I do not accept that individuals are blameless in accepting loans they cannot afford, regardless of what a lender is telling them.

Once in his life, every man is entitled to fall madly in love with a gorgeous redhead - Lucille Ball
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Mikhailoh
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If you want trouble, find yourself a redhead
In this Quirt and I are in agreement.
Once in his life, every man is entitled to fall madly in love with a gorgeous redhead - Lucille Ball
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Klaus
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HOLY CARP!!!
Mikhailoh
Nov 17 2008, 05:18 AM
In this Quirt and I are in agreement.
(* making a big red cross in the calendar *)
Trifonov Fleisher Klaus Sokolov Zimmerman
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JBryan
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I am the grey one
+1
"Any man who would make an X rated movie should be forced to take his daughter to see it". - John Wayne


There is a line we cross when we go from "I will believe it when I see it" to "I will see it when I believe it".


Henry II: I marvel at you after all these years. Still like a democratic drawbridge: going down for everybody.

Eleanor: At my age there's not much traffic anymore.

From The Lion in Winter.
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Piano*Dad
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Bull-Carp
Mortgage? What's that? :whome:

Paid it off years ago. Hate debt.
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Mikhailoh
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If you want trouble, find yourself a redhead
Well then you are REALLY in trouble! Not participating in the marketplace? Guilty.

What was it? 'Brave New World' that was an impersonal culture based on consumerism and narcissism? 'You deserve it!' . So many parallels.
Once in his life, every man is entitled to fall madly in love with a gorgeous redhead - Lucille Ball
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QuirtEvans
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I Owe It All To John D'Oh
Piano*Dad
Nov 17 2008, 06:01 AM
Mortgage? What's that? :whome:

Paid it off years ago. Hate debt.
Yeah me too. What chumps we are.
It would be unwise to underestimate what large groups of ill-informed people acting together can achieve. -- John D'Oh, January 14, 2010.
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OperaTenor
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Pisa-Carp
Do not construe what I'm about to say as condoning this stupidity.

Let's say you're a responsible homeowner with a sane mortgage, and you're making your payments like you always have all of your life. Your neighbor across the street is one of these toxic mortgage poster children. Is it better for the value of your home for that neighbor to stay in his house with a dream of a renegotiated loan, or for him to default?

I've been dead-set against this bailout crap form the moment I heard about it. We should never have handed any more money to Wall St. However, I thought that if we were going to do anything, it should have been an effort to detox these bad mortgages if at all possible - rescue the situation from the ground up. My idea was to create a kind of hybrid - something between the Resolution Trust Corp. and a national bankruptcy court to go through and try to make each of these existing mortgages solvent, in order to both get the loans paid, and keep people in their homes. Not exactly fair, but better than the alternative. I got laughed at a lot for that, but it turns out that's exactly the kind of thing the FDIC is currently promoting, according to one senior WaMu finance manager I spoke with about it - he didn't laugh at me at all.

(This guy apparently has some major juice. I joked about my WaMu financial advisor not returning my calls since the financial sh!tstorm hit with this guy on Friday night, and first thing Monday morning I get a call from the advisor.)



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Copper
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Shortstop
Mikhailoh
Nov 17 2008, 05:18 AM
In this Quirt and I are in agreement.

Count me in.
The Confederate soldier was peculiar in that he was ever ready to fight, but never ready to submit to the routine duty and discipline of the camp or the march. The soldiers were determined to be soldiers after their own notions, and do their duty, for the love of it, as they thought best. Carlton McCarthy
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Horace
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HOLY CARP!!!
Quote:
 
Elected officials have been chipping away at that by blaming the foreclosure crisis largely on predatory lenders. In a campaign fact sheet, President-elect Barack Obama says he "recognizes that the real victims in the subprime mortgage crisis are not the lenders, but the millions of borrowers who followed the rules and whose only crime was taking out mortgages that lenders told them they could afford."


the "real victims" are virtually the entire country, and most of us gained nothing from it and lost substantial amounts, something that neither delinquent borrowers with little equity nor lenders can say. So let's take both of those groups off of our "real victims" list please, since they are responsible for the mess and they are the only ones who rolled the dice to get something for nothing at the expense of everybody else.

But of course the "real victims" will always be whatever group is most politically expedient to label as the "real victims".
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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Horace
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HOLY CARP!!!
OperaTenor
Nov 17 2008, 08:20 AM
I've been dead-set against this bailout crap form the moment I heard about it. We should never have handed any more money to Wall St. However, I thought that if we were going to do anything, it should have been an effort to detox these bad mortgages if at all possible - rescue the situation from the ground up. My idea was to create a kind of hybrid - something between the Resolution Trust Corp. and a national bankruptcy court to go through and try to make each of these existing mortgages solvent, in order to both get the loans paid, and keep people in their homes.
In order to do that, one would need to lower the mortgage on irresponsible borrower's homes to a lower point than new homebuyers could find, since so many of those borowers with the liar's mortgages simply don't have the incomes to afford homes even with the new slightly lower property values. One of the necessary maket repercussions of this, unless we go completely nutty with gifting homes to irresponsible people, is that property values go down. If everybody hurts then maybe we'll be more prone to exercising some tough love in the future to nip these problems in the bud, and maybe our culture will shift more towards personal responsibility. There is far too much shielding from real costs in this country (from health care to social security to this to probably a hundred other things) and it is a huge problem.

It's a nice idea as long as not too much effort was required (we're talking about thousands of tax payer dollars in man hours for each case, it sounds like) and even after all that there will be a huge number of tough decisions to make about whether to foreclose or gift irresponsible people expensive homes.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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OperaTenor
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Pisa-Carp
Horace
Nov 17 2008, 08:45 AM
OperaTenor
Nov 17 2008, 08:20 AM
I've been dead-set against this bailout crap form the moment I heard about it. We should never have handed any more money to Wall St. However, I thought that if we were going to do anything, it should have been an effort to detox these bad mortgages if at all possible - rescue the situation from the ground up. My idea was to create a kind of hybrid - something between the Resolution Trust Corp. and a national bankruptcy court to go through and try to make each of these existing mortgages solvent, in order to both get the loans paid, and keep people in their homes.
In order to do that, one would need to lower the mortgage on irresponsible borrower's homes to a lower point than new homebuyers could find, since so many of them with the liar's mortgages simply don't have the incomes to afford homes even with the new slightly lower property values. One of the necessary maket repercussions of this, unless we go completely nutty with gifting homes to irresponsible people as your plan would require, is that property values go down. If everybody hurts then maybe we'll exercise some tough love in the future. There is far too much shielding from real costs in this country (from health care to social security to this to probably a hundred other things) and it is a huge problem.
Um, that's focusing on an extreme end of the situation. There are lots of people out there with liar's loans who are borderline - those are the kind of people who could do it with a concession like a couple of points knocked off. I'm not saying they could all be saved, but a lot of them could.

Also, show me where in my post I said we had to gift anybody anything.

It's okay though. Yours is the same kind of nutty dismissal I've heard from others, but apparently the FDIC doesn't share your view.

Your edit:
Quote:
 
It's a nice idea as long as not too much effort was required (we're talking about thousands of tax payer dollars in man hours for each case, it sounds like) and even after all that there will be a huge number of tough decisions to make about whether to foreclose or gift irresponsible people expensive homes.


Do you also feel bankruptcy court is a big waste of time and money?

Also, the first line of my OP:
Quote:
 
Do not construe what I'm about to say as condoning this stupidity.



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Horace
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HOLY CARP!!!
I didn't dismiss it, only said that even after we invest the substantial tax dollars in skilled oversight required for each troubled mortgage, there will bea huge number of tough decisions to make about whether to gift people (partial) homes, or foreclose. How huge that number is in percentages and where to draw the line to let a home go into foreclosure will be telling but if the threshold is too high then the effort required won't be too worth it and if the threshold is too low then we're redistributing wealth from average joe to irresponsible dice rollers.

any plan which refis mortgages at a point which is not supported by the market is a gift and an outrage. But I am not saying your plan necessarily entails that.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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ivorythumper
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I am so adjective that I verb nouns!
OperaTenor
Nov 17 2008, 08:20 AM
My idea was to create a kind of hybrid - something between the Resolution Trust Corp. and a national bankruptcy court to go through and try to make each of these existing mortgages solvent, in order to both get the loans paid, and keep people in their homes. Not exactly fair, but better than the alternative. I got laughed at a lot for that, but it turns out that's exactly the kind of thing the FDIC is currently promoting, according to one senior WaMu finance manager I spoke with about it - he didn't laugh at me at all.

Why is that better than the alternative? If people can't afford the homes they bought, they move into homes they can afford. If they can't afford those (or they can't get a loan because they are bad credit risks from making bad choices) they rent, and it helps the rental market.

Eventually prices equalize to supply and demand. The whole bail out thing is carp to begin with. I am glad to see some of the liberals waking up to the importance of letting market forces rule, rather than the nightmare that we've just created with the bail out plan.
The dogma lives loudly within me.
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OperaTenor
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Pisa-Carp
IT read my OP.

Quote:
 
I've been dead-set against this bailout crap form the moment I heard about it. We should never have handed any more money to Wall St. However, I thought that if we were going to do anything, it should have been an effort to detox these bad mortgages if at all possible - rescue the situation from the ground up.




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ivorythumper
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I am so adjective that I verb nouns!
I did. So why is your idea better than letting the market forces establish market value?
The dogma lives loudly within me.
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OperaTenor
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Pisa-Carp
I didn't say it was.

I said it was better than handing bailout money over to Wall St.


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ivorythumper
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I am so adjective that I verb nouns!
OperaTenor
Nov 17 2008, 12:21 PM
I didn't say it was.

I said it was better than handing bailout money over to Wall St.
I read "Not exactly fair, but better than the alternative." where the alternative was letting market forces decide value. That's not what you meant?
The dogma lives loudly within me.
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