I just read the NY Times article on a proposed “HomeOwner Rescue Plan” for people who’s houses are now worth less than their mortgages. In the both the article and the comments there are a number of people who say that unless this bailout happens, then millions of people could lose their homes or have to severely curtail their lifestyles and that this is un-acceptable in America. The main rationale seems to be that if some people bear economic pain then it could hurt everyone else. Some of the proposals include forgiving mortgage amounts that are above the current value of the house. The last time I checked the only people offering “pay what you can afford” plan are charities. If we start forgiving debts and freezing ARMs then we’re letting the US government into the business of re-writing private sector contracts. When Hugo Chavez in Venezuela nationalizes Exxon assets - he gets demonized…but if the US Nationalizes the debt of people who bought houses they can’t afford that’s saving the country?

There is and will be a lot of economic pain as a result of this mess, but it’s better that the economic pain is born by the people who made the bad decisions versus people who made good decisions and lived within their means. People who make good economic decisions tend to use resouces efficiently – if the US wants to maintain its position in the world, then we need to use our resources efficiently. It should be a net positive if we reward (or don’t punish) people who’s values and actions are aligned with prudent decision making and efficiency vs. the “I need it now” mentality that has been at the fore until recently.

Reminder to self – blog on the Marshmallow Test in the near future

There are plenty of people in the US that used the loose credit environment to take on debt that they could not afford, so that they could live an unsustainable lifestyle. That’s their decision – but I shouldn’t have to pay higher taxes, so to pay off their new Lexus or whatever lifestyle choice they made. If someone didn’t take the time to understand the loan they were getting – well – tough cookies – hopefully they’ll learn a lesson and won’t make the same mistake next time.

Let’s not forget that the vast majority of people out there are not going to lose their homes. If some people lose their houses – well there are lots of renters out there that I’m sure would be happy to buy them up at rational prices. If housing prices come down – well then more people can afford to buy houses. There are plenty of people out there who have been waiting to buy houses at prices that won’t keep them in debt the rest of their lives – just because some people decided they couldn’t wait that doesn’t mean I want to pay for their house/car/RV/Vegas vacation/etc.

It’s better for us to clear out this mess all at once – if the government tries to bail out homeowners – it will just extend the period of pain before this is worked through and re-direct the resources of the productive prudent people in this country to subsidize people who paid irrational prices for their houses.

Below an interesting chart to put housing prices in perspective.

How Much Money You Can Get for a Reverse Mortgage Will Increase and Qualifying for a Reverse Mortgage Will Get Easier with the FHA Modernization Bill

The FHA Modernization Act is designed to improve the Federal Housing Authority’s ability to help Americans obtain safe and affordable home loans and many see the Act as an answer to some of the woes of the subprime debacle. The Act is a bipartisan measure and has the support of the Bush Administration as well as both consumer and industry groups.

S. 2338, the Federal Housing Authority (FHA) Modernization Act, is good news for borrowers interested in a Reverse Mortgage. The Bill has been passed by the Senate by an overwhelming majority (93 to 1) and many hoped that it would be tacked onto the Economic Stimulus Package and be signed into law this week. However, it was not and is now waiting to be voted on by the House of Representatives. The House version of this Bill differs in many ways, but on HECM Reverse Mortgage issues, the House and Senate versions are identical.

The FHA Modernization Act Will Improve the Terms of Reverse Mortgages

The FHA Modernization Act will change the HECM program (HECM is the most popular type of Reverse Mortgage) in the following ways:

• Offer a Single National Loan Limit: Currently the actual amount you can qualify for with a HECM Reverse Mortgage varies depending on your county. The FHA Modernization Bill sets a single national limit of $417,000.. For most borrowers this means more money is available to them.

• Eliminate of the Authorization Cap: Currently only a set number of Reverse Mortgage loans may be granted. The FHA Modernization Act eliminates this limit, enabling the FHA to authorize as many loans as the market demands.

• HECM Could Be Used for Home Purchase: Currently Reverse Mortgage borrowers must reside in their home for at least one year before they can get a Reverse Mortgage on it. The FHA Modernization Act enables borrowers to actually purchase a home with a Reverse Mortgage — assuming an adequate down payment. This change makes a Reverse Mortgage an appealing loan for retirees who are downsizing and others.

• HECMs Could Be Used on Coops: Currently only single family homes are eligible.

• New Limits Would be Set on Reverse Mortgage Origination Fees: Fees would be limited to 1.5 percent of the maximum claim amount verses the current 2% percent of the maximum claim amount (or FHA lending limit in the county). More information on fees is available here:
  • New Fees:

  https://nrmlaonline.org/nrmla/publications/midMonthReport.aspx?article_id=578

  • Current Fee Structures:

  http://www.newretirement.com/Services/Reverse_Mortgage_Fees.aspx

As a whole, these changes should mean more money and better terms for seniors doing a Reverse Mortgage.

Learn More About FHA Modernization and Contact Congress Now

If you wish to see the FHA Modernization Act become law, consider contacting your Congressperson. You can locate them here: http://www.house.gov/

To learn more about The FHA Modernnization Act, visit here:

http://www.opencongress.org/bill/110-s2338/show