The government unveiled the Home Affordable Modification (HAM) program today, and the provisions are interesting, exciting, and devastating, depending on who you are.
First the interesting part. If you are:
1. Anyone with an FHA or VA loan
2. Anyone that doesn’t own a home
3. Anyone that has a mortgage greater than $729,750 (don’t ask me, I didn’t make it up)
4. Anyone that got a new mortgage this year
5. Anyone that cannot verify his income
6. Anyone that is not willing to claim “financial hardship”, meaning some sort of negative change to employment, income, or loan terms over the past year or so
then the terms of the HAM program are interesting, because you don’t qualify for a mortgage modification under this program, and that means that the benefit you get from this is that your tax dollars are going to be used to pay other people’s mortgages for the next seven or eight years.
If you are not any of the people described above, then you at least have a shot. Your lender MUST consider your application if you ask them to (though they can eventually reject it). Your HAM comes in the following flavor:
1. Your interest rate will be modified by your lender until your mortgage payment is 31% of your gross monthly income, or just above that. By “payment”, they mean principal, interest, taxes, insurance, and HOA or condo fees. The rate may be reduced as low as 2%, but no lower.
2. There are no costs to you of any kind.
3. The interest rate will remain at the reduced level for 5 years, at which point it will rise, 1% per year, until it hits the rate cap. The rate cap is the market interest rate at the time of modification – today it would be 5.25%. Your rate will remain at that level until the note is due or the loan paid off.
Sound exciting? Thought it would. Here are the things that don’t matter:
You have a bad credit score
You are currently delinquent
You are currently in foreclosure
You are currently bankrupt
You are upside down in your house (owe more than it is worth)
None of these things will disqualify you. The lender is going to verify your income, and they are going to try to prove that you are not a danger to default, so they can deny you. It is not in the lender’s interest to modify your loan, so be prepared for skepticism and the third degree. But if you qualify, the lender MUST grant the modification.
Now for the devastating part.
If you are hoping this will help the economy, you’re delusional. Yes, it will probably stem the tide of foreclosures, at least a good chunk of them. But the damage to servicing banks will be beyond anything yet imagined, and all of them – ALL OF THEM – will have to be nationalized. Essentially, the federal government will be the only lending entity in the US.
Don’t believe me? Think I’m exagerrating? Check this out: the government estimates that seven to nine million homeowners will benefit from this program. Ha. The problem with the government in general and THIS government specifically is that they don’t understand how markets work. People are going to move Heaven and Earth to get a slice of this HAM. A fixed rate for 5 years as low as 2%? I know good, decent people that would commit felonies for that.
But they don’t have to. Not by a long shot. All they have to do is get in financial trouble. Do I have to describe to you the myriad ways that is possible? Come with me as I describe just one: furloughs. As an employer, I have two employees that might qualify for this program. As a small business owner perpetually strapped for cash, I can always use to reduce my expenses. All I have to do is furlough my people and PRESTO! they’re going to qualify. The business reduces its overhead, the employees get a large, government-mandated interest reduction, and everyone is happy except Countrywide and Wells Fargo, who have mortgages currently at 6.5% that will now be at 3%. I hire the people back, and away we go. It’s so simple it makes stealing candy from a toddler look like a manned mission to Mars.
That’s one idea. It took me and my staff exactly seven minutes to come up with it, and we are not excessively bright, either. There are some really smart people out there, and I can’t wait to see what they come up with. They have time – the program continues for another three and a half years.
Did you miss the part where this is devastating? Let me explain. Banks currently have on their balance sheets loans at certain interest rates. Now, the bad loans everyone knows about, but the good ones are the things that keep the bad ones from destroying the entire enterprise. HAM takes those loans and makes them all spectacularly risky. No bank will be able to count on those 6%, 30-year notes to non-delinquent borrowers remaining on their balance sheets. At any time they might be forced to modify them to much lower rates. They can’t be securitized well under those circumstances. Banks can’t back lending with assets they can’t estimate the value of. Around and around we go. Let’s stick it to the banks, we say, then we wonder why nobody can get a mortgage loan anymore. These are businesses, and they exist only so long as they can make money. When they can’t, what used to happen was that they went bankrupt and a competitor bought them. Now what happens is that the government takes them over. I confidently predict that almost every servicing bank in the US will have that happen in the next 18 months because of this program.
It’s also devastating for the mortgage lending industry, of which I am a tiny part. At one blow, more than half of my potential lending pool was destroyed by HAM. All of my conventional borrowers, with the exception of those that have so much income that a 31% DTI wouldn’t help them, are no longer candidates for refinances. I spent 10 years building a database large enough to sustain my business, and now, essentially, I have to build the entire thing all over again with FHA borrowers and purchasers. It is vanishingly unlikely that I will be able to do so in this kind of market. The one saving grace of my business this last year and a half has been low interest rates. Well, they’re still low. But they’re not THAT low. How can I compete with the Audacity of Hope?
So there you have it, folks. The Home Affordable Mortgage program. If I didn’t already know, I’d wonder if pork and ham came from the same animal.