obama

Making Home Affordable expanded again - borrowers allowed to refinance loans up to 125 percent of value

Xin Lu — Thu, 02 Jul 2009 20:04:56 +0000

When the Obama administration first announced the details of the Making Home Affordable program in March, the guidelines for the refinance portion stated that the loan refinanced cannot be more than 105% of the value of the home. Now a new expansion of the program allows the loan to value ratio to be up to 125%. Will this help consumers or just worsen the situation?

This is actually the second expansion of the mortgage plan since March. The first expansion allowed people with second mortgages to modify or get rid of their second loans. Here are some examples of what this new change means for borrowers.

Example 1:

Original home value: $600,000
Current loan amount: $480,000
Current home value: $450,000
Loan to value ratio: 106.7%

In this example the borrower would not have been able to qualify for the original plan since the current loan to value ratio is above 105%, but the new change allows this borrower to apply.

Example 2:

Original home value: $500,000
Curent loan amount: $480,000
Current home value: $380,000
Loan to value ratio: 126.3%

In this example the borrower still would not be able to qualify for the refinance program since the drop in home value made the loan amount to be above 125% of the value of the home.

Some changes have occured in the mortgage market since March. First, the 30 year fixed mortgage interest rate has risen by almost a whole percentage point. Additionally, appraisal rules have been tightened so it is possible that appraisals would come in lower than expected. Since the Making Home Affordable Refinance plan does not help borrowers pay any fees on the refinance it may not be worthwhile to go through the process if your mortgage rate is not significantly higher than the market rate.

Finally, it is unclear how successful the Making Home Affordable program is right now since it has been only a few months and there is no official published data on the total effects yet. I think the fact that they are constantly loosening the guidelines is not a good sign. Additionally, it seems foolish to allow Fannie Mae and Freddie Mac to continue refinancing debt that they know is bigger than the underlying collateral. This is worse than 100% financing because it is 125% financing. However, if this encourages borrowers to stay away from default, then I guess it is good for the lender.

What do you think? Will this new expansion help you get a lower rate on your mortgage or do you think this program will worsen the current situation?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

Obama Eases Treasury Costs with At-Home Money Printing Stimulus

Paul Michael — Wed, 01 Apr 2009 20:57:57 +0000

Everyone is feeling the economic crunch these days, and that includes the Treasury department. It’s no news to anyone here that there has been increasing unhappiness with President Obama’s latest rounds of bailouts, but today could be a turning point for his recent negative PR. And it’s going to save the government a fortune.

Recent reports have shown the US Treasury to be in trouble financially. This from USA Today:

For the first time in U.S. history, the cost of manufacturing both a penny and a nickel is more than the 1-cent and 5-cent values of the coins themselves. Skyrocketing metals prices are behind the increase, the U.S. Mint said in a letter to members of Congress last week.
The Mint estimates it will cost 1.23 cents per penny and 5.73 cents per nickel this fiscal year, which ends Sept. 30. The cost of producing a penny has risen 27% in the last year, while nickel manufacturing costs have risen 19%.

You don’t need to be a financial genius to know that this is just throwing good money down the drain. And plans are already afoot to do away with smaller currencies and ask retailers everywhere to round prices to the nearest 10 cents. This will also stimulate more money for small business, as $2.99 will round to $3.00, giving the store or business an extra penny on each purchase.

However, a plan that is being implemented immediately is the At-Home Money Printing Stimulus. All it requires is a computer and a printer, and you can basically use your home office to print out all the money you need, with your printer being the new ATM.

Using a simple software installation, you will log into your bank account and make a withdrawal, as you would from an ATM. Instead of getting traditional cash, you will instead receive image files (PDFs) that contain the money. For those of you wondering about fraud, each new note will have a unique barcode. See sample below.

Once the barcode has been used once, it will deactivate. So, if anyone tries to photocopy the bills, they will be out of luck. The unique barcode also helps the government track your spending habits. So, if you download $100 and use it at Crate & Barrel, that information will be relayed back to a database, helping the government plan for future stimulus bills.

As almost every store has the ability to read barcodes, this new technology can be implemented straight away. Any smaller outlets without barcode scanners will continue accepting cash, checks and credit cards.

All major banks are on board, and you can download an instruction manual here. It certainly won’t be for everyone, but it’s a step in the right direction and the millions it will save the US in printing costs can be spent on paying down our national debt.

Written by Paul Michael and published on Wise Bread. Read more articles from Wise Bread.

Details of Obama's mortgage plan released - Will you benefit?

Xin Lu — Wed, 04 Mar 2009 21:17:39 +0000

Today the Obama administration officially released the final details of the mortgage plan that was announced a few weeks ago. Here is a quick summary on what is in the plan and how homeowners can find out if they are eligible for a new loan.

As previously stated, there are two portions to the plan. One portion allows non-delinquent homeowners who have underwater mortgages to refinance to a lower rate, and the second portion allows delinquent homeowners to get a loan modification. Here are the general guidelines.

Making Home Affordable Refinance Guidelines

The home being refinanced must be your primary residence. This includes 1-4 unit homes, condominiums, and manufactured homes.
The loan must be secured by Fannie Mae or Freddie Mac. You can find out if your loan is owned by these institutions by calling 1-800-7FANNIE, or 1-800-FREDDIE. You can also find out online at www.fanniemae.com/homeaffordable or www.fanniemae.com/homeaffordable
You must be current on your mortgage payments. This means that you do not have late payments in the last 12 months.
All loans that are refinanced will be refinanced into 15 or 30 year fixed rate loans. The interest rate would be based on the market rate on the day of closing. The loans also would not have any prepayment penalties or be a balloon note. Borrower will be responsible for fees associated with the refinance.
The amount you owe on your first mortgage cannot be more than 105% of the value of your home.
You also need a stable income to qualify for a new mortgage.

Making Home Affordable Modification Guidelines

The mortgage in question must be on your primary residence. This includes 1-4 unit homes, condominiums, and manufactured homes.
You must demonstrate significant hardship such a loss of an income. If you have enough liquid assets to pay your mortgage then you do not qualify.
The mortgage to be modified must have been originated on or before January 1st, 2009.
The unpaid principal balance must be equal or less than the following:
- 1 Unit: $729,750
- 2 Units: $934,200
- 3 Units: $1,129,250
- 4 Units: $1,403,400
Each mortgage can only be modified under the program once.
If you qualify for the program you can receive a Pay-for-Performance Success Payment that pays for the principal balance on the loan as long as you are current on the payments. You can receive $1,000 per year for up to five years.
Foreclosures will be suspended while borrowers are being considered for a modification.
The program targets a front end debt to income ratio of 31%. This means that the loan should be modified so that the borrower's principal,interest,taxes,insurance, and HOA is 31% or less of his or her gross income. The government will allow services to reduce the ratio to 38% and then kick in a cash subsidy to reduce the amount to 31%.
If the borrower has a back end debt ratio of more than 55% then they are required to speak to a HUD-approved counselor. The back end debt ratio is the total amount of debts the borrower has to pay each month. This includes credit cards, car payments, student loans, and any other obligations.
The modification will last 5 years. The floor for interest rates is 2% and the cap is the market rate on the day of the modification. If the loan is modified through temporarily lowering interest rates then it would go back up to the market rate after five years.
No modification fees will be paid by the borrower.
Current late fees on the delinquent balances will be waived.
Servicers will be compensated $1,000 for each eligible modification.
Servicers will also receive a $1,000 per year Pay for Success fee for up to three years. This is payable 12 months from the time the borrower starts the program and makes timely payments.
Lenders or investors will be paid a $1,500 one time incentive for each successful modification.

The details seem to indicate that the focus is really to help those who cannot currently afford their homes stay in their homes. One thing that I find a bit ironic in these details is that the delinquent borrowers who qualify for the modifications will be able to get $1,000 per year for paying on time while those responsible borrowers who have always paid ontime do not even get a break on the refinancing fees. Anyway, it is estimated that about 9 million homeowners can enroll in this program. If you do qualify for either program you can contact your loan servicer starting today. The official page for this program is at http://www.financialstability.gov/makinghomeaffordable/.

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

Will Obama's new mortgage plan really reward responsibility?

Xin Lu — Thu, 19 Feb 2009 07:13:52 +0000

Today President Obama announced a new $75 billion Homeowner Affordability and Stability Plan to the world. It is touted as a plan that helps responsible homeowners who have not yet missed payments. However, will it really reward responsibility? Lets take a quick look at what is in the plan.

First, this plan will provide low cost refinancing for homeowners who have underwater mortgages. Since a lot of homes lost large chunks of equity in the past few years many people cannot refinance into lower rates right now. This plan basically allows people with conforming Fannie Mae or Freddie Mac loans to refinance at market rates. This actually is not very different from the existing Fannie Mae to Fannie Mae streamline loan that does not require new appraisals. The homeowners should be making ontime payments on their loans and this would just reduce their payments. This portion of the plan is supposed to help 4 to 5 million people who have mortgages guaranteed by one of the GSEs. Jumbo mortgage holders are out of luck.

The next portion of the plan is meant to stop struggling homeowners from going into foreclosure. Basically the government will give lenders incentives to modify loans so that a borrower's mortgage is no more than 38 percent of his or her income. Then the initiative would lower the payments down to 31 percent with more subsidies. This lowered rate would last for at least five years, and then be stepped up. Incentives to servicers include an up-front fee of $1000 for each successful eligible modification, and also up to $1000 each year for three years as long as the borrower is current. The borrower could also get $1000 per year for five years for staying current.

Another portion of the plan that encourages housing price stability is to discourage lenders from foreclosing on mortgages. Basically, the Treasury department will create an insurance fund of up to $10 billion to guarantee against home price decline. Basically the lenders will be receiving insurance payments on modified loans to guard against housing price drops.

Personally, I like the portion of the plan that lets responsible borrowers refinance into lower rates. I know several people who bought in the last few years and have no trouble paying their mortgages. However, they cannot refinance now because their home values have gone down 20% to 30% and their downpayment is gone. This will help them tremendously and cut their monthly payments by hundreds of dollars. The money they save could be spent on other things. It is unfortunate that it only applies to Fannie Mae and Freddie Mac loans, but I guess there is also comfort in the fact that the government cannot twist private investors' arms to accept low rates.

As to the second portion of the plan, I am not too sure how the servicer incentives will work out. In recent years mortgage servicers have been quite unscrupulous and rewarding them may not be such a good idea. I understand that many struggling homeowners are trying to do the right thing and keep their homes at all costs, but the reality is that it just may not be worth it to keep a loan that costs as much as 38% of a family's income. Considering that more than half of loan modifications failed last year, it seems like the servicers would come out the ultimate winners by collecting thousands of dollars in bonuses and then foreclosing on the homes.

More details about how to qualify for these refinances and modifications will come to light on March 4th. If you are eligible for the refinance and modifications, then you should get your ducks in order right now. Some documents you should have ready are paystubs and W-2s. You should also try to improve your credit score in case there is a lower bound on credit scores. I can see this plan helping many people reduce their mortgage payments, but many others may just end up being tied a bit longer to debt they cannot pay.

What do you think? Does this plan really reward responsible borrowers or does it stink of bank bailout? Feel free to leave your thoughts in the comments!

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

Recession Journal Part II: Broke or Poor?

Jabulani Leffall — Mon, 19 Jan 2009 02:55:12 +0000

As the inauguration of a new president gets into full swing, I think about something President-elect Barack Obama said during his campaign that probably won’t make the history books and may even perhaps get lost in years of records of his riveting oration.

He said “We’ve been living beyond our means and we're going to have to make some adjustments."

The hardest part will be adjusting our minds. So much of how we spend, how we feel, what we use our money for and the lengths to which we will go to feel a high when we have no money is all a matter of perception. The more grateful you are for your station and the less you want, generally the better off you are.

This is illustrated plainly in the story of Christopher Greenslate and Kerri Leonard, a couple who are both high school social studies teachers and decided they’d live on a dollar per day as an experiment. Mind you, in America, living on a dollar a day is impossible but they did it by buying corn meal and oats, making their own bread and other third-world confections. Soon they realized that they spent just as much time as they saved money and ended up donating money they made from blogging about the impossible feat. It was kind of like “whew glad we don’t live in Kenya.”

But it was an exercise with meaning for them and they got the word out and elicited some thought.One to grow on here. Being frugal is a luxury you can afford when you ease up on, well luxuries.
While there is nothing more demoralizing than watching nearly your whole check go toward bills, it’s also an opportunity to look at why this is happening and change your life.

And before cats get at me on the comments section wondering what the relevance of this post is, know that I’ve been broke as well as poor and I’m speaking from experience. Breaking habits and not counting pennies is the first step.

Let me break it down for you real quick. When you’re middle-class and you’ve screwed yourself up in the game money wise, you learn fast that from a relativity stand point, being broke is actually worse than being poor - at least in your spoiled mind - and you learn the subtle differences.

When you’re poor, you might go to the local tienda, convenience store, 99 cents store or what have you and get two weeks worth of corn meal, some taco mix and a gang of beef and or meat of some kind, maybe some rice, a big can of beans. You eat what you eat, you eat what you can, you listen to the radio, watch pirated TV, just sit outside and people watch, you drink malt-liquor, a trip to faded land that costs less than $2.

In short, you dance or Kool-Aid your travails away. You’re poor, you know no difference, you know no better and you often don’t know where your next meal is coming from. Broke is: ‘Naw can’t go to the club this week,’ gotta catch you later. Poor is: Man, I can’t feed my family. This is why we must understand fundamentally while some of our exercises in saving go for naught and why when things turn around, we forget our lessons.

Unfortunately in America just eat one bite from the tree of knowledge, just one trip out of town, just one spending spree, just one feel of fine fabric, one morsel of Kobe steak can actually program your hard drive in a way that’s hard to undo.Sit in a restaurant with no television once in a while you can easily graduate into the purgatory of being broke because you’re constantly fulfilling wants and then find that your needs still aren’t being met.

It’s the classic carrot on a stick that is the American dream. It’s where most of us live, the check-to-check middle class, striving for the luxuries in between commutes, watching premium channels, paying bills for ancillary items that are of no necessity whatsoever. But then you get stuck in your purchased identity as your cost of living rises with your standard of living.

One can certainly go from Ground Chuck to Filet Mignon but it’s hard, if not impossible to go back, not back for a week or two but habitually back, back through the portal of simpler times, when money or the lack thereof didn’t rule the day.

For those of you who are Horatio Alger or just went from ashy to classy or became the first in your family to graduate college, I think now is the time to get back to basics and more important, figure out what your basics are.

Written by Jabulani Leffall and published on Wise Bread. Read more articles from Wise Bread.

Could the last person to leave America please turn out the light.

Paul Michael — Wed, 17 Sep 2008 23:17:53 +0000

I don’t know about you, but I’m more than a little worried by recent economic events. First Freddie Mac and Fannie Mae, then Lehman Brothers, and now an $85 billion loan to AIG. Some people would have us believe that despite all of this, the foundations of our economy are strong. But with trillions of dollars in debt now on the table, how long can this country keep racking up the red ink?

Laurence J. Kotlikoff, professor of economics at Boston University, outlined a story today that sent a chill down my spine. The big, bad fact that had my heart thumping was the staggering $70 trillion liability facing our government. As Professor Kotlikoff explains:

This represents the present value difference between all the government's projected future spending obligations and all its projected future tax receipts. This fiscal gap takes into account Uncle Sam's need to service official debt--outstanding U.S. government bonds. But it also recognizes all our government's unofficial debts, including its obligation to the soon-to-be-retired baby boomers to pay their Social Security and Medicare benefits.

Given current policies, each of the 78 million boomers can expect, on average, to receive $50,000, in today's dollars, from these programs in each and every year of retirement. Multiply 78 million boomers by a $50,000 annual payment and you get close to $4 trillion per year. This helps you see why our nation's true indebtedness is so extraordinarily high.

There are other obligations, too, that aren't calculated into the national debt, or even in the $70 trillion, but for which the government remains at risk. House prices haven't stopped falling. They are down 20% from their peak two years ago. But they remain 70% above their value in early 2000. That was the year prices started going crazy. If the price pendulum swings back to 2000, we'll see the mortgage default rate, currently at a record 9%, soar.

Now, I’m no economic genius (I'm sure many of you will point this out later) but I do know that a $70 trillion liability is not going to go away overnight. In fact, whether you vote for John McCain or Barack Obama, this vast economic problem will be inherited by the next President. And when he’s sworn in next year, he’s taking on a burden that will only get worse before it gets better, if it ever does.

As this crisis (and it is a crisis, as far as my understating of the word goes) deepens, there will be no end to the bankruptcies in our nation, despite those laws being tougher now than in the past. And not just that, but the aftermath for the rest of us will be cataclysmic.

Banks and financial insitutions will be running scared. Try getting a car loan or a mortgage that has a decent APR, if you can get one at all. You may have perfect credit, but that just means you’ll be approved for a slightly less offensive loan than the guy sat next to you. If you have any equity left in your home, which is diminishing more rapidly with every passing day, you’ll be very lucky to get a home equity loan or line of credit.

As of August 2008, we’ve had almost 450,000 new jobless claims this year . That doesn’t include the massive layoffs coming from the fallout of corporations like Lehman Brothers and, potentially, AIG. And Analysts are saying that the full-scale damage caused by these losses will not be fully understood for months. That means there is even more bad news on the horizon.

This, readers, is a very scary time. A time when the Dow Jones can drop 500 points in one day. A time when the value of the dollar is in freefall. And a time when the price of everything from gasoline to milk and eggs is rising.

Then there’s healthcare. Both Obama and McCain have a plan for it , and neither one looks good to me. Healthcare is broken, and no-one seems to know how to fix it without leaving casualties. I’m more scared by McCain’s plan to be honest, because it eliminates tax benefits for employers. And when that happens, employers will most likely dump healthcare coverage for employees as it becomes too costly to subsidize. McCain’s tax credit to families will offset the blow, but not by much. $2000 doesn’t buy you much coverage these days, if you can actually get coverage.

But from what I understand, Obama’s plan will cost an absolute fortune to implement, and it’s not like the U.S. can just conjure that money from thin air. It has to come from somewhere. But where?

As the U.S. is such a lynchpin in the global economy, we can already see the effect our economy is having on the rest of the world. Tourism is down because of, among other things, the rotten exchange rate (try turning in your Dollars for Euros and see what kind of chump-change you’re left with). Not just that, but the import/export situation is getting dire. I know of companies in the UK that are going out of business because American firms can no longer afford to import their products.

From what I’ve been told, there’s not much you or I can do to stop this freight train, so ultimately it’s not something to worry about (really?) What will happen will happen, and we’ll just have to ride it out with everyone else. However you look at it, these are dark times. But if someone, an economic Einstein, can shine a ray of hope on all of this horrible news, please share before I start looking into life on Mars.

Written by Paul Michael and published on Wise Bread. Read more articles from Wise Bread.

Investment Gains Taxes Increase - The Worst Tax Policy Ever?

Xin Lu — Fri, 20 Jun 2008 09:37:12 +0000

Yesterday Paul Michael wrote an article comparing the income tax policies of McCain and Obama and suggested that he would vote for Obama because Obama's tax policy would benefit everyone but the uber-rich. In the comments on the article there are many great comments about the candidates' tax policies and how it is not so simple to say that Obama's plan is better. One particular comment that stuck out to me is about Obama's stance on doubling capital gains taxes, and I think that is possibly the worst tax policy ever, and here is why.

Capital gains taxes are assessed on every sale of "capital" we conduct. The capital could be stocks, funds, or a business. Currently, the capital gains tax rate on investments held for more than a year is 15%, and for investments held for less than a year the tax rate is the same as a person's ordinary income. What Obama is proposing is to raise the long term capital gains tax rate back to 28%. He says that he wants to do this "for purposes of fairness" in a debate.

I have no idea why Senator Obama thinks this tax increase is fair in any way to all the individual investors like you and me who are by no means super rich. Actually, I think doubling the capital gains tax would discourage people from saving and investing and that is a horrible thing in my book. When we put our after tax savings in investment vehicles like stocks and mutual funds, all we are trying to do is to beat inflation and protect the wealth we have worked for. Capital gains taxes is already a double taxation on gains of money that has already been taxed. When this tax gets nearly doubled, it is a bigger slap in the face for honest hard working people who are trying to save for the future.

Additionally, many retirees who are liquidating their taxable investments will feel the pain of this tax increase. For most retirees, it is not enough to just live off of IRAs, 401ks, pensions, and Social Security so many people have normal taxable investment accounts. Suppose a retiree saved up a nest egg of $150,000 of which $100,000 is long term capital gains, then this particular retiree will lose $13000 if the capital gains taxes were raised from 15% to 28%. This is a significant amount of money and could be worth several months of living expenses. Is it fair to punish these people who built up their nest eggs honestly and responsibly by investing?

In addition to raising capital gains taxes, Obama wants to raise the taxes on dividends significantly. This will have a similar detrimental effect in dwindling investment gains all across the board for all investors big and small.

So does Obama's tax plan really benefit the people with low and middle income as much as Paul's article states? Well, personally I have always said to everyone I know that your wealth is not about how much income you make, but how much assets you have. It is possible for a family to have a nice plush portfolio without making so much income every year as long as they are good savers and wise investors and these families will be unjustly and severely penalized under Obama's proposal. So I believe in the long run Obama's tax policies punish all those who try to build wealth by investing, and that is not very wise.

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

McCain or Obama? Who’ll be better for your wallet?

Paul Michael — Thu, 19 Jun 2008 17:50:16 +0000

I want to keep this factual. This is not an article on who should be the next President, or as these campaigns usually go, who shouldn’t be President. This is a simple presentation of facts as they stand today. Bottom line - who’d be better for your bottom line next year...Obama or McCain?

The Tax Policy Center has done some serious analysis of the current tax policies of our two candidates. You can read about it here , and download the 37-page report here . Of course, as these are preliminary figures they’re likely to change a little, but not a lot. Sam Pizzigati of the blog Too Much analysed the figures . And the results, while not exactly surprising, do provide food for thought.

As you’d expect, Obama’s tax plan will be better for lower-income families. And McCain’s tax plan favors the wealthy. There is a simple graph below that outlines the figures.

The analysis
First, Obama. Under his proposed tax plan, the super-rich (around 140,000 households or the top 0.1% of the US population) have a lot to worry about if he becomes President. In fact, in 2009 the top 0.1% will pay roughly $701,885 MORE in taxes than they do currently. If you’re making over $2.9 million a year, your taxes will increase to 39.2%.

The middle-income earners (the middle 20% of the US, earning between $37,595 and $66,354) do a lot better under Obama, getting a boost of roughly $1042, or around 2.4%.

And the low-income families (the poorest 20%, earning below $18,981) get the biggest boost of all. They’ll be around $567 better off, an increase of 5.5%.

Now McCain. Under his proposal, the super-rich get a little richer. That same 140,000 households get a 4.4% increase in after-tax income, equating to around $269,364.

The middle-income earners get a boost with McCain too, although much smaller. They’ll receive a 0.7% increase, or $584.

And the low-income families, well, McCain does offer them some relief. But not much. Around a 0.2% increase in after-tax income, or a whopping $21.

What does this mean?
Politically, McCain is doing what Bush and Reagan did before him. It’s the trickle-down effect. You give the super-rich big tax cuts, they in turn use those cuts to boost business and create jobs for the middle and lower classes.

Obama is more in another Republican’s camp – namely, Eisenhower. In 1959, the wealthy paid over 45% of their income in Federal taxes. And around 77% on estate wealth.

Personally, leaving all other political agendas aside, I’d have to vote for Obama under this plan. I would receive greater tax benefits from him than under McCain. And if you’re in a low income bracket, I’m sure you’d prefer $567 in your pocket rather than the $21 McCain is offering.

Of course, this is subject to change but the point is clear. The more money you have, the better off you’ll be under McCain. If you’re a super-rich Wisebread reader, the difference between McCain (+$269,364) and Obama (-$701,885) works out to $971,249. That’s almost $1 million dollars! With so much at stake for you in 2009, I can see why you’d vote for McCain. But is McCain trying to buy the rich vote and maintain good relations with corporate interests? That’s a story for another time.

Written by Paul Michael and published on Wise Bread. Read more articles from Wise Bread.