July 11, 2011
Kim Luu is the editor of Money and Risk and a principal at an independent brokerage firm specializing in retirement and 401(k)s.
The federal Home Affordable Modification Program was badly designed, overly complicated and poorly communicated. Borrowers suffered through horrendous paperwork for months and years. People ran through their retirement savings during the process, and then lost their homes anyway. Meanwhile, banks are saddled with billions of dollars in losses and inventory that still need to be auctioned.
For the thousands of homeowners dropping out of or failing to qualify for HAMP, it has obviously not been a success. People in foreclosure are not the only ones affected. We all suffer because bank loan losses translate into reduced stock prices and lower retirement account values.
If we are asked to pay billions for another rescue, we need a simple-to-execute program that protects the homeowners, the banks and the investors.
The solution doesn't have to be radical. I'm not a proponent of lowering the mortgage amount. When someone enters into a contract to borrow money, it is a commitment to be honored. They should be held responsible for paying it back as the money that they borrowed came from the bank deposits of their neighbors. Cutting mortgage debt because home value dropped encourages speculation now and in the future.
The primary issue for troubled borrowers is variable payment size -- not variable interest or loan amount. Whether they went into a low starter payment to buy a house that they knew full well they could never afford, or whether they are 50 years old and got laid off and now making 50 percent less, HAMP should have addressed this issue with a meaningful solution.
Here's one proposal: adjust the payment schedule to the individual's specific situation without absolving responsibility for the debts. There is nothing wrong with a 40-year amortization if you plan to live in your home for life. Review the loans periodically and adjusted rates and payments back to market as income improves. Homeowners can request a review for adjustment up at any time. During unemployment, payments are deferred on negative amortization or are switched to interest only.
Give people the chance to work through financial distress with personal dignity and pride. Help those who are committed to staying in their homes. Let the speculators suffer foreclosure.
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Hanging On to Houses
Kim Luu, editor, Moneyandrisk.com
Morris A. Davis, University of Wisconsin
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