Saturday, June 20, 2009

Say no to a recourse refi

Via:  Market Ticker  Posted as a public service.  See also On the coming neo-feudalism 

The Dumbest Thing I've Seen Yet

President Obama and James Lockhart have decided to (financially) rape Americans.

Yes, really:

June 19 (Bloomberg) -- President Barack Obama’s program to help more homeowners refinance may be expanded to include borrowers who owe more than 105 percent of their homes’ values, Federal Housing Finance Agency Director James Lockhart said.

The Obama administration is considering allowing Fannie Mae and Freddie Mac to refinance loans with current loan-to-value ratios of 125 percent or higher, Lockhart said at a National Association of Real Estate Editors Association conference in Washington yesterday.

Let me be absolutely clear so nobody can ever accuse me of being less than straightforward on this.

If you are underwater on your house and take a deal like this, you are as dumb as a box of rocks and have just consented to being bent over the table and violated repeatedly.  That our government would propose "allowing" such a thing is fomenting financial rape upon The American Public.  Period.

Under conventional financing terms loan-to-value (LTV) ratios over 80% have required what is called "PMI" - private mortgage insurance.  The purpose of this is to guarantee for the lender that they can recover if you don't pay and, post-foreclosure, your home isn't worth enough to satisfy the mortgage.

One of the reasons for this requirement is that in most states purchase money first mortgages are non-recourse.  That is, if you default they can take the house and ruin your credit - but it ends there.  In those states they cannot pursue you beyond foreclosure and reclamation of the house.

In every state if you refinance the resulting mortgage is a recourse loan, which means they can sue you for any deficiency if you subsequently default and come after any other assets (other than retirement funds - which is why you NEVER EVER raid a 401k or IRA to stay afloat!) and even try to get a wage garnishment - and they just might!

For this and other reasons nobody should ever refinance a mortgage that is in trouble without getting qualfiied legal and accounting advice.  It could be the cheapest $500 you ever spend.

President Obama's original "refi" program exempted LTVs from 80-105% from PMI requirements, ostensibly as a way of "helping" homeowners.  What it really did was rape the taxpayer, because such loans are very dangerous in that if there is a subsequent default the lender will, after expenses, almost always lose money, and may lose a LOT of money.

We have since discovered that the majority of "refinanced" workout loans default again, because the underlying problem is that the buyer used exotic financing to get around their inability to actually cover the fully-amortizing payment of a conventional mortgage.  When faced with a fully-amortizing payment, even when restructured, they re-default because they bought through a fraudulent device - they were never able to afford the house in the first place.

This plan will not change that. 

Only one thing will change that: lower house prices.

But see, the NARites and other politically-connected rubes will not allow the truth to be told, or the market to assert itself so long as the government can bury you in insoluble debt.

The Chinese and Japanese will fully rise (they're already half-awake) soon and when they do, the curtain will be called down on this stupidity via the bond market.  Indeed, the blow-out of MBS spreads yesterday might have been due to a leak of this stupidity - there is no more-certain way to guarantee that Fannie and Freddie, now wards of the Federal Government, will detonate and leave a thermonuclear-sized hole in the Federal balance sheet than this piece of stupidity.


No comments:

Post a Comment