Responsible Home Buyers, Why Be Frugal?

I was laying in bed this morning, listening to discussions of the Homeowner Affordability and Stability Plan, the 2009 version of a Homeowner Bailout. (The 2008 version was spent on the banks.) I listened closely because I had to decide if it was worth getting out of bed to earn the money to pay my mortgage or not. Like all those bankers that got a bailout, I was wondering if it might be worth more to me to default on my mortgage than to pay it. I mean, what if the only people getting bailed out are the ones who truly screwed up? Being right doesn’t mean being rich and I didn’t want to miss out.

I realized that I’d have to get out of bed and get to the office anyway if I was going to make sense of this Plan. Radio sound bites are no substitute for real research. Timmy Geithner put several documents up on his website. Much like his plan to print $2.5 trillion, it’s still more rhetoric than reality but at least this time they included lots of number, so I’m happy to rifle through it.

Step one in the Fact Sheet is “Refinancing for Up to 4 to 5 Million Responsible Homeowners to Make Their Mortgages More Affordable.” The Plan offers an example of a family with a $207,000 30-year fixed rate mortgage at 6.5%. The house value has fallen 15% to $221,000 so they have less than the 20% home equity needed to qualify for current mortgage rates (close to 5%). The lower interest rate would save this homeowner $2,300/year in mortgage payments.

First of all, this homeowner’s monthly mortgage payment is $1,308 –about 8.6% of all mortgages fall into this range. About 60% of mortgages are below that level. If the mortgage is too much bigger than that, they are into “jumbo” territory in a lot of areas, so we’ll say this plan is directed at the lower 60%. The example of a $260,000 home is a little pricey – the median new home in 2008 was $226,000 and the median existing home price was $202,000.

The lower price isn’t just because home prices are falling. The US median has never been higher than $247,900 except in places like New York and California. But the median home price has not skyrocketed in vast swaths of middle-class, middle-America. Finally, reducing your payments by $2,300 in a year means a monthly savings of about $200 – enough to cover a northern winter utility bill.

If they reach the 4 million homeowners that they say they will, that’s 5.3% of all homeowners. But only 1.19% of all mortgages are in foreclosure and only 1.83% are 90 days past due. Maybe they are going to help the slow-pays, because 6.41% of all mortgages have some past due payments. President Obama specifically said that he was doing this to help regular, middle-class homeowners. That should not mean those who have homes worth more than the national median.

Then there’s this 15% drop in home value in Geithner’s example. The national median fell 8.6% from 247,000 at the beginning of 2007 to $225,700 in the third quarter of 2008 (latest available from HUD). In the West, where California homes have a higher median than middle-America, the median new home price rose from $320,200 in 2007 to $414,400 at the end of 2008. That’s a whopping 29.4% increase in the median price for a new home! Eastern US median home prices did fall, but by 12.6% not 15%. Still, I wouldn’t be hard pressed to find a city or two or three where home prices fell by 12%. But it doesn’t appear that they will be middle-class homes in middle-America. Existing home prices have fallen across the board. But only in the West did these prices fall at an alarming rate. The average for the other regions was only 8.7%.

Let’s look at the rest of the bill: “A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners.” This part is for those with adjustable-rate mortgages (“have seen their mortgage payments rise to 40 or even 50 percent of their monthly income”) and excludes those slow-pays (“before a borrower misses a payment”) that appear to be getting help from Part One. This Part is only available to those who have a high mortgage-to-income ratio and/or whose mortgage balance is higher than the current market value. Under the “Shared Effort to Reduce Monthly Payments” the federal government would step in to make some of your interest payments after the bank can’t reduce your interest rate any further.

There’s nothing here that says you’ll have to pay the government back that money – ever. But if the interest rate reduction isn’t enough, and having the government make some of your interest payments still doesn’t get you down to a mortgage payment that is no more than 31% of your income (one of the definitions of affordable), then the government will even pay down some of your principal.

But wait, that’s not all you get! If you and your bank can work out a deal here’s what else Uncle Obama will throw in for you:

Wow! I’m really beginning to regret being a responsible person. I comment on Part 3 of the plan tomorrow. But this is really discouraging. I'm ineligible because I bought responsibly, before the Stimulus Bill gave out incentives to buy. I suspect there are about 70 million households out there just like me. Trillions of dollars running around the economy and all I can see is that the responsible majority will be paying for it while irresponsible bankers, brokers and home buyers benefit.

To tell you the truth, I need a tissue…

Read Part II of this look at the Housing Bailout.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.