President Designate Obama Tells People Not to Pay Their Mortgages

Before I start, let's look at a very relevant video...




Now, it's important to understand that for Obama's true believers, he will literally take care of everything. As such, among his remarks on the economic crisis, here is one thing he said today.

Now, this recovery plan alone will not solve all the problems that led us into this crisis. We must also work with the same sense of urgency to stabilize and repair the financial system we all depend on. That means using our full arsenal of tools to get credit flowing again to families and business, while restoring confidence in our markets. It means launching a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes.

Now, of course, I am not saying based strictly on these lines that Obama is telling people not to pay their mortgage. Yet, he has set the marker down. Under his administration, foreclosures will be at a minimum. As soon as the struggling borrower wraps their arms around the ramifications of this, you are likely to sell all sorts of folks begin to fall behind on their mortgages knowing full well that Obama's policies will save them in the end.

Make no mistake, this is no partisan talking. Instead, this is a mortgage professional that has watched politicians falling over themselves to save borrowers talking. What we will see in the coming months is a plethora of high profile acts by Barack Obama meant to stem the tide of foreclosures. As soon as the public understands the details of these plans, many of them will realize that they will benefit more if the stop paying their mortgages.

Watch for President Obama to make loan modifications one of the centerpieces of his adminstration. A loan modification is simply an agreement between a bank and a struggling borrower to improve the terms of the loan in order to make it more affordable. In other words, if you fall behind on your loan, not to worry, because there will be a loan modification that will give you a new loan that you can afford.

There are several things that President Obama can do regarding loan modifications. In California, it is illegal to foreclose if a loan modification isn't done first. In that state, the law invites people to fall behind because they literally get a better rate if they do. If President Obama were to enact this law nationwide, he would invite the entire nation to fall behind on their mortgages.

Beyond this, he could guarantee loan modifications with Treasury, Federal Reserve, or FDIC money. By doing this, he would encourage significantly more loan modifications.

The other thing he can do is propose a bill similar to that passed last summer by Chris Dodd that would have FHA, or another government agency, buy up troubled mortgages and offer these borrowers more attractive terms in order to make them more affordable. This is similar to something that John McCain proposed as well. This would have a similar effect to loan modifications only it would be done with a new loan from a new bank.

Now, everything I have just said is already occurring however the Bush administration hasn't been altogether public with it. Obama sees tackling the rising tide of foreclosures as an economic necessity and an electoral victory. He is very likely to use the bully pulpit to make his intentions clear.

Now, both the concept of loan modifications or guaranteeing new loans will work much like the concept of sub prime. As soon as sophisticated, greedy, and/or unscrupulous borrowers and mortgage professionals understand how the system works, they will all game it. If President Obama demands that loans be saved rather than foreclosed, what he will do is create an industry for doing exactly this. Since his main concern will be to save struggling borrowers, expect little or no regulations. Whatever regulations there maybe will easily be manipulated as soon as the industry gets its arms around it.

As I have said, loan modifications are already becoming an industry. That's without the push that Obama will give. The job of a company doing loan modifications is to do as many as possible. Their job isn't to separate which people deserve it and which don't. Their job is to figure out if someone can qualify and then get them to qualify. As soon as the rules are worked out, you will see loan modification companies offering this to as many borrowers as possible. That's their job.

The same thing will happen if a new bill is passed in which new loans will be guaranteed. Mortgage professionals, like me, will wrap their arms around what the details are then attempt to put as many people into these loans as possible.

Here's the clincher. For both loan modifications and for refinancing into new loans, one of the pre requisites will be that you are behind on your current mortgage. After all, only if you are behind are you threatened with foreclosure. As such, as all of these programs become more popular people will soon figure out that they are better off falling behind on their mortgages. It will work like everything else. Someone will get some great deal by doing what I just described. They will tell their friends and soon word will spread. Soon enough, we will have a mass exodus of people deliberately skipping their mortgages in order to get deals they normally wouldn't get.