President Obama has crafted a policy that will help just about anyone currently in a mortgage. Yet, at the same time, he has a policy that does absolutely nothing for someone buying a home and, in some cases, punishes those looking to buy. Such a policy is disjointed and ultimately counter productive.
Recently, President Obama has rolled out his loan modification plan as well as his plan to refinance millions of loans that have loan to values above 80%. President Obama will attempt to lower the mortgage payment of up to 9 million current home owners.
The loan modification program is one I have written about often. It will allow anyone with a "hardship" the ability to lower their mortgage payment so that their housing payment will be no more of their gross income than 31%. As such, anyone in trouble, or near trouble, will be able to have their mortgage payments reduced with the subsidy of the government.
The plan to refinance loans above 80% is still not finalized, but it will allow many borrowers currently above 80% to refinance their loans while having the mortgage insurance, normally associated with such loans, waived. Because Fannie/Freddie are currently owned by the federal government, the government is directing the two to waive mortgage insurance normally associated with these loans. As such, millions of borrowers will pay hundreds of Dollars less monthly as a result of this program.
These rather drastic steps are being done in an effort to stabilize housing. Of course, housing will never really be stabilized until people start buying more. The reason that housing has fallen so far is because people stopped buying. To spur buying, the president has done absolutely nothing, and, in fact, he has gone out of his way to make it more difficult. During deliberations on his stimulus bill, the Republicans tried to put in an amendment to bump the credit for purchases from $7500 to $15000 and the Republicans wanted to apply it to any property purchased. (currently it is only for first time home buyers) Instead, the credit was raised a mere $500 to $8000.
Beyond this, the President is looking to raise taxes on the wealthiest Americans, and he's looking to reduce the deduction on mortgage interest for the same wealthy Americans. The administration justifies this increase in tax burden by implementing both in 2011. By then, the administration says, the economy should be recovering. Of course, this totally disregards human behavior. Mortgages are a long term endeavor, up to thirty years. Anyone looking to buy would need to account for future tax burdens. As such, dually raising income tax burdens and reducing the mortgage deduction will significantly reduce home purchases in that bracket.
Furthermore, the loan modification program ends with mortgage balances of $729,000. So, what does all of this mean? It means that while the administration will do all it can to stabilize home prices for low and mid priced properties, it will have policies that will put even more downward pressure on prices for expensive homes. Of course, real estate prices aren't determined in a vacuum. If prices on more expensive homes are falling that affects the next price range down as well. If five bedroom homes are falling in value, that also means that four bedroom homes are falling in value as well. Since a five bedroom home has to be more expensive than an equivalent four bedroom home.
So, a policy in which current mortgages for low and mid sized homes are stabilized, while purchases aren't encouraged and downward pressure is placed on expensive homes is not a strategy for stability in the overall market. Such a disjointed policy is nothing more than a recipe for disaster.
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