In reference to Little Hope For Hope Now Alliance I misread one of the eligibility requirements. In fact a key one.

The plan pertains to those with LTVs higher than 97% lot lower. I read the statement as at least 3% equity was required for the freeze, instead it is at most 3% equity is allowed for the freeze.

I had this Email exchange with CalculatedRisk.

Mish, those eligible have to have a LTV higher than 97%.

Many of these people have negative equity. They can’t refi – they can’t sell – and when their loan resets, they probably can’t make the payment. They are stuck, and foreclosure is the only way out.

This is a plan for investors!

The idea is to get people to keep making mortgage payments on a loan that is worth more than the collateral. A neat trick! If these “homeowners” really crunched the numbers, they would realize it’s better to walk away, and rent for less money, rather than to keep making the mortgage payment.

The plan is sold as helping homeowners. It is designed to help investors.

Sucker Trap For Homeowners

While there is nothing new or shocking in the statement about who the plan was designed to help (we all knew who the plan was designed to help before), this is even a bigger sucker trap than I first thought. This plan was purposefully and carefully constructed to help virtually no one but lenders. The very last thing the lenders want is to foreclose on homes that are hugely underwater.

What Homeowners Benefit?

This plan will benefit homeowners who meet ALL of the following requirements.

  • The homeowner has at most 3% equity
  • The homeowner is not hugely underwater on current loan to value.
  • The home is in an area where home prices are not apt to plunge over the next few years.
  • The freeze will permanently prevent foreclosure.

It takes all four conditions before homeowners will benefit. The plan has negative benefit for nearly everyone in the small select group of people that meet the carefully crafted eligibility requirements. I find this plan galling.

Nonetheless my previous conclusions were correct:

Fix on top of fix on top of fix are being proposed and none of them will work because it is in the best interest of those underwater on their loans to make sure the plan fails.

Now that the details are finalized, we can clearly see that very few people percentage wise will be helped by this bailout proposal. The real damage lies ahead with pay option arms, Alt-A, and second mortgages.

Mike “Mish” Shedlock
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