For those of you who didn’t like the Obama Administration’s foreclosure prevention programs, you’re really going to dislike this idea for "improving" the Home Affordable Modification Program (HAMP) from ACORN. In a recent paper entitled Improving Outcomes in the Obama Administration’s Home Affordable Modification Program, ACORN advocates principal reduction rather than forebearance for the following reasons:
Without the ability to build equity, many of the economic benefits of homeownership are lost. The homeowner will not qualify for a secured loan for home repairs, medical expenses, or college tuition and they will receive nothing at the settlement table when they sell their home. More importantly, they will have nothing to pass on to their children. Given the large number of first-time homebuyers in the last fifteen years, especially in African American and Latino communities, forbearance reverses many of the gains made in homeownership and familial net worth. By permitting the homeowner to financiall recover and build some semblance of future wealth, principal reductions are far more likely than principal forbearance to stabilize distressed families and the housing markets in which they reside.
Theoretically the goal of the HAMP program is to avoid foreclosure, not build equity so that a homeowner can borrow more against it. Does it really make sense to reduce the principal balance so a borrower can borrow more and raise the principal balance? If the borrower can afford to make the payments on a higher balance, why the need to lower it?
As for the nothing at the settlement table or nothing to pass on to their children arguments- why should the American taxpayer provide these funds? All Americans are paying for these foreclosure programs through taxes, inflation and an increased national debt. This negatively impacts the wealth building potential for the many in order to benefit a few already. Now we should provide funds to build equity too?
ACORN is correct that without the ability to build equity, many of the economic benefits of home ownership are lost. [That's why so many underwater borrowers have walked away- they've figured that out.] That’s why so many of the "exotic" mortgages were so dangerous- the only possible way for homeowners that utilized them to build wealth was through appreciation. When appreciation disappeared, homes went from being assets to liabilities. That’s why sucking out all of the equity through HELOCs and refinancing was dangerous- again, without appreciation, homeowners are left without a financial cushion to protect them them in economic lean times or when appreciation disappears.
Yes, equity is important. If a homeowner can’t build it through paying off a mortgage over a reasonable amount of time, the homeowner should consider more affordable housing. An affordable home is much less likely to go into foreclosure, and with the savings, homeowners can save for a rainy day, build wealth and pass something on to their children- and do it all at no cost to the taxpayer. That speeds economic recovery for everyone.
UK House Bubble
Ohio Fraudclosure
Bubble Meter
Northern Virginia Housing Bubble Fallout
Mish's Global Economic Analysis
Breaking News Relevant Articles© Copyright 2012 Housing Doom | Copyright© 2011, AuthentiCraft, Inc.
“More importantly, they will have nothing to pass on to their children.”
Um.. they have the house. Last I checked the government wasn’t taking those when you died. Sell it and split the money between the kids, and hope they make better financial decisions?
Linenoise -
The implication is that there will be no equity in the house to speak of.
Hello! Acorn, Obama, Harry Reid, Pelosi, underwriters, and the liberal org.
Down payments, 2 yr job history, and 680-700 FICO scores will give you equity! Lesson learned too late huh?
Pffft….Go back to School! Bunch of economic, financial illiterates!
crashproofed,
it’s gonna be a long 4 years. these clowns are downright evil. igor is downcast