Thursday, June 23, 2011

The Mother of All Entitlements

Remember last year when the federal government announced that Recovery Summer was well underway since the economy had actually been in recovery phase since 2009?  Well apparently the Recovery did not make its way to most of us, because we are now in the summer of 2011 and Recovery is nowhere in sight.  Unemployment remains high, home valuations are plummeting, and thanks to the Dodd Frank bill we are facing a dismal mess in the housing market.

In light of all of these problems, the federal government appears to have determined that we need more economic stimulus--more entitlement programs.  Apparently, if we get enough entitlement programs, we will all be comfortable and happy.  And, to kick off the summer, on Monday the Department of Housing and Urban Development rolled out a brand new program--the emergency homeowner loan program.  The EHLP is such a doosey of a program that it deserves special recognition. So today I am borrowing a phrase from our Middle Eastern friends and naming it "The Mother of All Entitlements."

As with everything else involving housing, EHLP is actually based in the Dodd Frank bill. Last year, as part of the massive piece of legislation which is now crippling the housing market and closing down scores of small businesses, Congress authorized $1 billion to be used to provide mortgage assistance to unemployed or under-employed homeowners for up to 2 years.  The cap on the amount of assistance that any one homeowner can receive is $50,000 or 2 years--whichever comes first.  The rules are simple--a homeowner must be three months delinquent on their primary residence mortgage due to job loss, illness or the overall economy--both self employed and wage earners are eligible.  The homeowner must have experienced at least a 15% reduction to their gross income because of one of these factors.  Finally, foreclosure of the residence must be imminent as documented by a notification of intent to foreclose or a self-certification from the homeowner that they are three months past due on their mortgage and foreclosure is therefore likely.

Although the legislation actually caps the individual amounts to $50,000, in its announcement on Monday HUD stated that it plans to offer about $35,000 in assistance to about 30,000 families located in 27 states and Puerto Rico.  Since there are likely to be significantly more applicants than available loans for each state or county, competition is expected to be fierce.  For example, in Pueblo County, Colorado, the county is expected to receive enough funds to assist about 84 families, so they may have a lottery for the qualified applicants.

As part of the selection criteria, HUD counselors must determine that the homeowner has a reasonable likelihood of being able to begin making the primary mortgage payment again within two years.  To prove this the counselors must show that the debt to income ratio of the homeowner does not exceed 55% of their income prior to job loss or income reduction.

The loan to HUD has to be repaid if the homeowner sells or moves out of the house, increases their income to more than 85% of the "pre-event" level, or "fails to report changes in unemployed status or income."  If  three to six months before the end of the two year period, the homeowner is still unemployed or underemployed, the homeowner will be required to meet with a HUD counselor to explore short sale and loan modification options.  Underwater borrowers will be encouraged to explore short sale options while they are receiving assistance.  An underwater homeowner selling his home on a short sale will not have to repay the funds to HUD.

A homeowner who gets his income back and starts making his mortgage payment also does not have to repay the funds if he makes timely mortgage payments for five years.  The balance of the note to HUD is reduced 20% per year until the note is extinguished at the end of five years.

This program has got to be one of the most wasteful uses of taxpayer money ever conceived.  I know what some of you may be thinking.  When I did the piece on Suze Orman entitled, "Suze Orman is Wrong--Don't Walk Away," I said that walking away from an underwater mortgage is a bad idea, so some of you may be thinking, "First you criticize strategic default; now you criticize a federal program to help homeowners stay in their homes.  Make up your mind."  When I wrote the piece on strategic default, I was referring specifically to people who can make their mortgage payments but choose not to because their values have dropped and instead walk away.  The HUD program targets homeowners who are not working, or at least have experienced a dramatic drop in income, and who clearly cannot make their payments as evidenced by the fact that they are three months behind.  They cannot pay their mortgage--plain and simple.  So instead of allowing the foreclosure process to happen, the U.S. taxpayer is going to subsidize 30,000 of these people to stay in their homes for two years with or without work.

A person who is unemployed, or underemployed today whether through job loss or the loss of a business needs to make some life changes.  Those life changes may include moving to another place geographically where the person can start over and find work.  By subsidizing the mortgage payment for 2 years, HUD is making it possible for these people to sit where they are.  Apparently, the folks at HUD don't know about the law of inertia--an object at rest has a tendency to remain at rest until acted upon by an outside force. I know this is going to sound very harsh, but  I am speaking from personal experience here: when times are tough people get out and do what they need to do to make ends meet unless someone enables them not to.   But for a lot of people, two years of unemployment checks and two years of mortgage assistance is just enough motivation to keep them from doing anything to  improve their own situation until the money runs out. And at that point, most of them will get foreclosed on anyway.

To put this in perspective, if you are business owner in this country today trying to get a small business loan, you are going to hear frequently that the government is really down on small business right now and that this is a really bad time to be trying to get a loan.  Even for business owners with good credit and a previous track record of repaying SBA loans in a timely manner, this is a difficult time to get financing.  As far as the federal government is concerned, an unemployed homeowner who is 90 days late on their mortgage is a better credit risk than a small business person trying to work and generate income. 

As with the rest of the Dodd Frank bill, this is a poorly-conceived, expensive proposal which will not help anyone.At the end of seven years, I would love to get an honest accounting from HUD of exactly how many homes were saved and how many homeowners resumed their payments for five years in a timely manner. The numbers of success stories coming out of this program will be miniscule.  And tax payers will be $1 billion dollars poorer.

For related articles and books by Alexandra Swann visit her website at

No comments:

Post a Comment