The Democrats Attempt to Save Homeowners – Another “Solution”

Yesterday I talked about one aspect of a weak plan from our politicians in Washington to save the homeowner from foreclosure. It was a big benefit for big business and little for the distressed homeowner. Now Representative Barney Frank has his ideas on the table to help the homeowner.

I can sum up this latest attempt to help homeowners. The bottom line is that Congress has to APPEAR that they are solving the problem. Politics are all about appearances. Are they really helping anyone? Well this latest idea (read: political spin) has the three qualities that stand out in most political solutions.

First, it is too little too late. By the time this or any other piece of legislation actually gets passed, the bulk of people in trouble will have already been failed by the current system. Second, the plan has headline grabbing details. Reading the details of this plan leads a person to think that Washington is really helping people. Third, it is a plan that helps a very small percentage of people.

The plan is set up for the FHA to, in a sense, buy mortgages from banks from struggling homeowners, readjust their payment, and then the government would share in any gain that the homeowner receives after the sale of the home.

Of course, the bank has to agree to take a loss on the mortgage and forgive some of the debt. It is not clear as of yet whether the homeowner would take a tax hit on the portion of the loan that was forgiven. As of today, the homeowner would pay federal income taxes on any portion of a loan that is forgiven.

We could walk through the details of the plan. However, it is not necessary. I will just tell you the political headline and then the few pieces of this legislation that assures only a very small percentage might be helped.

In an article written about the newest round of legislation it says,

“Frank's bill would allow a whole new swath of homeowners who are currently too financially strapped to qualify for a government-insured loan to do so. That includes people who are badly behind on their mortgage payments, have poor credit and hefty debt, and those who owe more than their homes are worth.”

This is the best part of the “solution.” They will only re-finance up to 90% of the home value. Let’s see, most of these people who are in trouble borrowed close to 105% of their original home value. You factor in a 20 to 25% decrease in value. You can do the math.

This plan will only help those who actually have equity in their homes. This is the problem. With declining home values and homeowners mortgaged to the capacity, they will not be able to qualify for enough loan to actually cover the mortgage. Thus, this plan will not help those who need it.

Then there is my second favorite part of the article.

“One major task of the board will be to figure out how to compensate those who hold secondary claims on a home, who would walk away with no more than 1 percent of the home's value.”

You think that might be a problem? It is a huge understatement. There are thousands of investors who have invested in these horrible loans. Now they have to take a hit as Congress attempts to bail out a problem they could have prevented in the first place if they were actually doing their jobs as the governing body that is elected to protect Americans from these types of practices.

Just think of the political sound bites and photo opportunity for politicians when Congress finally comes up with their “homeowner rescue” plan.
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