My Analysis of the New Stimulus Plan

It's been a pretty hectic week here, but I had some time mull over the Homeowner Affordability and Stability Plan (HASP) that everyone has been chattering about. I decided the best way to address the plan is to outline the different components.

31% of Income Guideline:

The HASP has a component that allows banks to reduce a borrower's mortgage payment to 38% of gross monthly income. The government will then subsidize the difference to reduce the payment down to 31% of the borrower's income.

• I would estimate that maybe 25% of the borrowers we see have a debt to income (DTI) below 31%. A mortgage payment that is 31% of your income does not make it more affordable. I have borrowers with mortgages that are 40% of their income and they have no problem making timely payments. It is about responsibility.


• Why not go with the Fannie/Freddie guidelines of 45% max DTI? Why subsidize the payments at all? Where did Congress come up with this 31% figure?


• HASP helps borrowers with "income not sufficient to make their payments". Who is to say that the borrowers had income sufficient to make their payments when they took out the initial mortgage?

Changing the Bankruptcy Laws:

There is a push to change bankruptcy laws and allow judges to change mortgage terms.

• I am completely opposed. Would you have a brain surgeon represent you in your murder case? Not likely. Allowing a judge manipulate the mortgage industry is irresponsible.


• People will be lining up outside the courthouse looking for the "good judge" to tell them they are not going to be held accountable for their mortgage.


• What good is a contract (a mortgage or lien) if the person is not going to be held responsible?


• "If servicers embrace modifying loans, it will keep more people out of bankruptcy". No, borrowers being held accountable for their actions and spending responsibly will keep people out of BK. Allowing judges to change that eliminates even more responsibility from the financially irresponsible.

105% Refinance Clause:

This portion of the stimulus plan allows borrowers to refinance their existing 1st mortgage up to 105% of the value if the loan is already owned by Fannie/Freddie. The principle idea behind the clause is that if Fannie/Freddie are already assuming the risk, it is within their best interest to make the loan more affordable for the borrower through refinancing. The HASP bill uses the theory that the potential loses to Fannie/Freddie to refinance each of these loans is far less than the estimated losses each entity may incur through defaults. Details of the mortgage underwriting guidelines are set to be released March 4, 2009.

I am not completely opposed to this portion of the bill, but there are too many loopholes:

• The value of the property will not be determined until a borrower has filled out a mortgage application. My guess is that 50% of borrowers think their home is worth more than its actual appraised value. What happens when the borrowers spend the money for the appraisal only to find out they are over the 105% guideline? Now you're costing borrowers money as opposed to helping them and open up the door for banks and brokers to charge borrowers application fees and appraisal fees before the borrower even knows whether or not he or she is eligible for the program.


• The plan does not apply to 2nd mortgages. Hopefully, the underwriting guidelines will allow borrowers to combine 1st and 2nd mortgages that were used to purchase the property. Otherwise, the holder of the 2nd mortgage will never agree to subordinate the 1st mortgage unless they are receiving the same incentives as the 1st. Hence, the plan may never work.


• "Borrowers with little equity can refinance to take advantage of low rates." If the borrower has missed payments or their credit is below 740, he or she will have a difficult time getting the best rates on the market. Plus, the higher the LTV the higher the rate. Therefore, what makes someone think that a borrower with 105% LTV is going to be eligible for the best rates on the market. Expect a rate approximately .5% higher than the market rate. I place the responsibility for making borrowers aware of this on the media. They constantly advertise "mortgage rates at historic lows". Please educate borrowers on how rates will vary depending on the scenario.


• And my biggest problem...what happens to the mortgage insurance premiums? These borrowers are going to get smacked with ridiculous mortgage insurance premiums, possibly upwards of $300-$400 per month. Is Congress considering these higher mortgage insurance premiums when they say 'we're going to reduce your mortgage payment' or are they just reducing the mortgage payment then leaving the borrower to figure out they will have a massive mortgage insurance premium? If the later is the case, the stimulus plan is a joke.

The plan is not great, but it is not a total loss. I like the idea of allowing borrowers who have lost some value in their homes to refinance at a decent rate while rates are low. However, the truth is in the details. In two weeks we will see if the underwriting guidelines give borrowers an opportunity or just another false hope. Feel free to comment with your questions on the HASP housing stimulus plan and I will do my best to respond given the information that has been made available.

Meanwhile, make it a great day and check back tomorrow for Tuesdays Tip!

- Dan