The Home Crowd

An online petition is web-circulating from angryrenter.com, adding “signatures” of those who oppose the federal housing bailout. Their issue, of course, is having to foot the bill via taxes to bail out reckless lenders and homebuyers.

-From angryrenter.com,

But did you know that renters are 32 percent of American households? And that homes in foreclosure are less than 2 percent?

So why is Congress rushing to bailout high-flying borrowers and their lenders with our tax dollars?

Unfortunately, renters aren’t as good at politics as the small minority of homeowners (and their bankers) who are in trouble. We don’t have lobbyists in Washington, DC. We don’t get a tax deduction for our rent and we don’t get sweetheart government loans.

What is the bailout plan at this point?

- From CNN Money.com,

First, the lender writes down the principal to 90% of appraised value. That’s the amount the FHA would guarantee - that is, the amount that the government would pay the lender if the borrower defaults on the new loan.

So, in the example above, the new loan would be written down to $180,000.

The remaining $20,000 - 10% of appraised value - would be the borrower’s equity stake.

In addition, the lender must pay the FHA 3% of the loan amount ($5,400) to participate and up to 2% in closing costs ($3,600). So on top of forfeiting $20,000 in equity to the borrower, the lender pays $9,000 to the government up front.

The $29,000 the lender forfeits is 14.5% of the appraised value of the home, which means the lender is accepting in essence payment for no more than 85.5% of the home’s value. In addition the lender has agreed to forgive the $20,000 in additional debt above appraised value from the original $220,000 loan.

For their part, while borrowers will get a 10% equity stake in their homes, they will have to pay for their participation in the program as well.

If the interest rate on a 30-year fixed rate mortgage is 6.50%, the borrower in this example will have a monthly mortgage payment of $1,138.

On top of that he will also have to pay a 1.5% annual premium to the FHA based on the principal balance of the loan, which will decline over time. That computes to $225 a month extra in the first year since his initial loan balance is $180,000.

Add to that property taxes (we assumed $167 per month) and home insurance (we assumed $50 per month), and his total housing payment every month would be $1,580.

The borrower will also be on the hook for an exit fee when he sells his home. The exit fee would be equal to the greater of 3% of the original FHA loan amount or a declining percentage of the net proceeds from the sale of the home. The percentage is 100% in the first year and falls to 50% by the fourth year and beyond.

Let’s assume he sells the house after five years for $200,000. He would have paid down his principal balance to $168,500, leaving $31,500 for disbursement.

But he’s not keeping the whole $31,500. He owes an exit fee to the FHA - in this case 50% of his net proceeds or $10,000. Since the house in this example sold for the same amount as its appraisal value five years earlier, the only net proceed is the borrower’s 10% equity stake, or $20,000. So the borrower would pay half that to the FHA and walk away with as much as $21,500.

If the borrower sells his house below the appraised amount, he would still owe the FHA at least 3% of the original FHA-insured principal, or $5,400.

And this plan, they’re estimating it to only apply to 28% of at-risk homeowners.  Everything that’s been hitting the fan, will continue to hit the fan for a lot of people.  Doesn’t seem as if there’s a happy medium for homeowners, lenders, renters and the economy.

But it seems as if taxes are raised, many renters who’ve been reluctant to gamble with creative mortgages, and homeowners without mortgages are going to be very upset by having to pay for the bailout.

And not often are we seeing the term “Accountability” thrown around enough.

• The homebuyers - You knew what you were getting into with a creative mortgage, if taking a huge hit from the bailout means you get to keep your home and don’t have the stain of foreclosure on your record, consider yourself lucky.
• The lenders - They bought the loans, they knew what they were, yet the housing market always goes up right.  Well, it stopped.  Deal with it.  Take the hit.  This bailout may take a big chunk of their profits, but backs up the difference.  And the lenders, well, the economy needs them to make the whole world go ’round, so expect them to get traditional mortgages back in style pretty soon
• The loan writers - For the most part, good hardworking people, same as you and I.  But there’s also many who are also good and hardworking, yet wrote bad loans that they either knew or suspected were bad loans.  Time to find a new career.  Some people were getting home loans that couldn’t even qualify to purchase an automobile.  Time to put and end to that and the ‘honor’ system of reported income.

(angryrenter.com spotted at the Zillow Blog)