On of the hottest issues in Politics today is, what should be done about the ever declining housing market if anything. The White House currently has a plan, but the skeptics ponder its effectiveness. Some believe it will do more harm than good; while The White House contends that it is our best bet. I see it as a bet; a gamble for our futures.
Its a PITI
PITI in mortgage lingo means (Principal, Interest, Taxes, and Insurance), these are the components of a mortgage. Hmm, PITI! Ironic isn’t it?
Property Taxes and Insurance alone often account for close to 35% of a mortgage payment; usually paid out in the form of an escrow account. Escrow accounts are a way of making sure that your state and local governments get their taxes owed out of you, and your lenders’ investment (your home), is protected. Your home is their collateral they need to make sure its protected, so if something bad happens and your home is destroyed they get their money out of it. Isn’t it nice that they let you pay a premium that they benefit from?
In the Obama Administrations’ plan to make bad mortgages affordable PITI is a key factor. It constitutes the percentage that must be met to achieve the Homeowners Affordability and Stability Plan or HASP. The percentage put forth by The Treasury Department is 31% of the borrowers gross income, thats pre-tax income.
To make a mortgage affordable and stable one of more of three factors: The interest rate, the principal balance, and the duration of the loan, must be altered.
Here is one problem with the plan: HASP does not account for Home Equity Loans, and Equity lines of credit that lender have to consider when issuing loans. This is a knot that must be untied before much good can be done.
In regard to the altering of mortgage loans in an attempt to make them HASP worthy. Foxbusiness.com put forth an example which examines the guts of the HASP plan far better than I could as I am not a big numbers guy. Their example reads as follows:
“For a sample household with payments adding up to 43% of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38% of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31%. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.”
The monthly payment on a $220,000, 30-year mortgage, assuming an interest rate of 6%, would be $1,319. On top of that, the typical borrower would have to pay about $660 for taxes and insurance each month for a total payment of $1,979. If that were 43% of income, it would mean income of about $4,600 a month or $55,200 a year (which is higher than the $50,200 median household income).
Could this mean back to the drawing board for The Obama team? If Foxbusiness is correct I hope so.
Economic pundits of the plan say the math doesn’t work with the numbers put forth by the Obabma Administration because the Tax and Insurance portions of the payments are fixed leaving all the altering to the Principal balance and the Interest rates. Coupled with the fact that the $75 billion pledged to bail out the housing market won’t be nearly enough to cover all loans in need of assistance. Many on Wall Street say it will cost closer to $275 billion to fund such an ambitious plan.
Here’s an idea, why doesn’t the government simply wave all property taxes for five years instead of forcing lenders to take less for contracts signed in good faith by mortgage holders?
Would that be more cost effective than doling out what many authorities on this stuff say will cost upwords of $275 billion?
Would this not help out the banks with all their bad paper too?
Wouldn’t they get the money the lended with at least most of the interest they’ve been counting on to stay afloat?
These are my thoughts. I’m just trying to make sense of a Cracked World.
