If you’re looking for even more good news in the real estate market these days, you don’t have to look far, as a new plan by the Federal Housing Finance Agency approves the a plan to cut mortgage balances and rework payments for tens of thousands of homeowners. According to a report by the Wall Street Journal and other sources. The mortgage aid comes under a program by the FHFA, regulator and overseer of mortgage-finance entities Fannie Mae and Freddie Mac.
They’re expecting more specifics to be released in the next few weeks, but the plan is expected to provide mortgage relief for about 50,000 homeowners in the U.S. Though the plan has not been finalized, it will most likely only target those who are underwater on their mortgages (they owe more than the home is worth) and people who are behind on their mortgage payments.
However, to temper expectations it’s important to note that mortgage principal forgiveness will be granted out not as a mandate but as in cases where Fannie and Freddie calculate that the mortgage amnesty will cost them far less than the risk of those homeowners foreclosing.
Although it sounds like a no-brainer for struggling American mortgage holders, the plan has already receiving its fair share of criticism. Housing experts point out that helping only about 50,000 underwater homeowners is just a small fraction of those who could use the assistance, as real estate researcher CoreLogic reports that about 4.3 million properties across the country are still in negative equity positions.
Critics also point to the fact that under the proposed plan, under water homeowners won’t have their principal reduced to the point where they have positive equity or are at a break-even point compared to what the home is worth, but only partially reduced. While it’s hard to see the logic behind partial principal reduction, it could serve as a powerful incentive for homeowners to want to keep their homes instead of foreclosing as the first option.
But part of the payment relief process may be the recalculation of monthly payments based on the loan amount, so lowering principal levels could also help reduce payments. Under the arrangement there will also be a workout process to keep delinquent homeowners in their homes and get them back on track and caught up.
Once this plan goes into effect, it will instantly classify as the most significant action Fannie and Freddie have taken to reduce mortgage balances and help struggling homeowners since the mortgage meltdown and housing crisis (which is quickly approaching its ten year anniversary!). But many think it won’t go far enough – or shouldn’t be enacted at all.
This proposed mortgage forgiveness plan is rekindling the debate about whether struggling homeowners who have missed payments should be helped at all. At this critical political season, personal “bailouts” are a tricky topic, especially when history shows that losing your house doesn’t necessarily have to be a catastrophic event, as millions of Americans recovered relatively quickly after foreclosing by renting, rebuilding their credit scores and finances, and even buying homes again in the last couple years.
In fact, many critics and conservative pundits are calling the premise behind the plan a “moral hazard, pointing to the flawed philosophy behind help certain homeowners but not others, ostensibly incentivizing people to miss payments or even stop making payments just to be eligible for the plan.
According to Mark Calabria, director of financial regulation studies at the libertarian Cato Institute, “Is the role of Fannie and Freddie to make sure your house doesn’t decline in value? I don’t remember seeing that in the charter.”
However, many economists and financial experts argue that normalizing principal and getting homeowners back on track with payments is the best solution compared to more defaults and foreclosures – and a great investment in people and communities. Those benefits also should save taxpayers money in the long run versus the cost burden of foreclosures.
“Homeowners behave differently when they feel like a glorified renter versus when they feel like they’re an owner,” says Julia Gordon, executive VP of the National Community Stabilization Trust.
Of course this debate is nothing new, as conservatives, liberals, various housing agencies, and even banks have thrown their hat in the ring the Obama administration rolled out the Home Affordable Modification Program years ago, which encouraged banks and lenders to reduce mortgage principal in many cases. The FHFA has been largely ineffectual at reducing principal, but studies show that reducing payments – not mortgage balances – help risky homeowners the most.
The argument for and against mortgage relief was deemed unnecessary and put aside when the economic recovery ensued and housing equity rose all across the nation at healthy levels, bring a huge number of homeowners back up from “underwater” on their mortgages.
But this new Federal Housing Finance Agency plan is rekindling the controversy, though its yet to be determined how much it will really help homeowners or affect the real estate market.
Are you under-water in your home and wondering what your options are, including the benefits of a short sale? Real estate in Sacramento has appreciated about 46% in the last five years, so you might be surprised how much your home is worth – and might even be able to sell for a healthy profit!
Contact us for a complimentary valuation of your home!