Housing Stimulus Package Treats Symptoms, Not Cure

Although not completely unreasonable, Obama’s housing stimulus package won’t really solve the foreclosure crisis because it addresses the symptoms, not the root of the problem, which is continued predatory lending.

Last summer, my husband and I easily qualified for a loan in order to purchase a home in Florida. We were approved in part because houses are cheap here, and the monthly mortgage payments with insurance and taxes were estimated to be about one quarter of our combined income.

However, due to the large number of foreclosures in Florida, we also had to put up our other house as collateral. We had just moved from Washington State, and were keeping our old home in case things didn't work out and we wanted to move back.

This was my third home loan with Countrywide Home Loans. But, this time, I left the closing table feeling I’d been ripped off. My mortgage payment would be about $200 more per month than what I was quoted when I put the offer in to buy this particular house. The closing costs were also about $7,000 higher than originally quoted several months before when I was first looking into buying a home, in part because the required percentage of down payment was higher. The interest rate had also gone up over the three months I’d been looking.

“Walk away,” some might say. “Find a new lender.”

Too late. I’d lose the chance to buy the perfect house that had taken me months to find as well all my earnest money which I’d put down as a deposit on the house a month earlier.

One of the clever ways Countrywide was able to justify their miscalculation of my monthly payment was to blame it on property tax. It is true that it is difficult to calculate tax since it’s all up to the property appraiser to decide how much your home is worth after you buy your home. New tax levies are also hard to pin down. The mortgage company was off their property tax estimate by about $100 per month, $1200 per year.

The first time you buy a house in Florida, whether you’re a long term resident or have just moved from out of state, can be a real shocker. Property tax on “non-homesteaded” homes is extraordinarily high. A $250,000 home will cost a “virgin” home buyer about $6,000 in taxes per year depending on the county and city where you buy your home. That adds another $500 per month onto your mortgage payment. This can be particularly upsetting when you learn that other homeowners in your neighborhood are only paying $500 a year, not $500 a month, for basically the same house, but that’s another story.

Second, I was told at the 12th hour, literally while signing on the dotted line, that I would have to pay PMI, private mortgage insurance. Unlike home insurance, PMI does me absolutely no good. It basically gives the lender back their money I borrowed if I default on my loan. At an extra $130 per month, this greatly increased my monthly payments. I haven’t had to pay PMI since I bought my first house, many years ago, at a young age and with only a small down payment. This particular extra charge annoyed me because I chose to go with Countrywide over Wachovia because I was given the impression that I would not have to pay PMI if I got my loan through Countrywide. The representative explained that it was in the fine print.

Once again, I felt I’d been ripped off. However, what was done was done. I would move on and move into my new home, choosing to cut my losses rather than start over the house hunting process from scratch.

Last fall, a few months after buying my new Florida home, I decided to consolidate my two home loans into one to lower my payment and remove the PMI. Once again, I talked to several lenders. Once again, I picked Countrywide over another because my quoted monthly payments would be lower. However, after receiving the paperwork, I discovered that I had been misquoted my mortgage payment by about $200 per month. Once again, Countrywide blamed it on property tax. However, this time, there was no excuse. The respresentative had all the numbers in front of him: principal, interest, property tax rolls, and insurance bills. A fifth grader could have done better math.

In addition, while reviewing the cryptic paperwork, I discovered that I had been charged points to lower my interest rate from an ungodly 9% down to 7.5%. (The rates on the two loans I was consolidating were between 5% and 6%.) As a former reporter, I’m pretty good at taking accurate notes, and the Countrywide representative used the term “you qualify for a discount,” not “you are buying points.” I had no interest in “buying” down my interest rate. I feel I should qualify for a very low interest rate based on excellent credit and equity alone.

In addition, $10,000 in fees were added to the home loan. Before you assume that I must be borrowing some enormous amount of money or have low equity to be charged 9% interest and $10,000 in fees, I must explain. The amount I would be borrowing was actually LESS than the amount of the original loan on the Washington State house. Plus, I now had MORE equity because I had wisely paid down the WA State loan early.

Only because I had the misquoted payments in writing, was I able to back out of the loan with no penalty. The representative, who’s demeanor had seemed as rosy and pleasant as a sunny day in Florida, turned nasty and defensive when I called him on the carpet. I expected an apology and discounted fees. Instead, he was insulting. I guess he was upset that he would lose his hefty commission.

I told my story to a lawyer friend who’s currently representing a city government in Florida in litigation with a mortgage company. He explained that after Bush deregulated everything, there currently isn’t an agency who oversees lenders to make sure they don’t underestimate monthly mortgage payments. "Unfortunately, in your case," he said, "there’s no one to complain to who will be able to do anything."

Obama’s stimulus package includes financial help for individuals who may lose their homes because they can’t afford to pay their monthly mortgage payments. The plan allows them to refinance their homes at a lower value than what their homes were originally valued at, which results in lower payments. So, if you bought a $300,000 home and still owe $280,000 on it, but it’s now only worth $200,000, you can refinance your loan at $200,000, which results in lower payments. Taxpayers pay the difference, the $80,000 back to the bank. (Update on 2/26/09: Details of how this will actually work are unclear. One local Orlando banker predicts that banks would only receive $6,000 per loan, no matter how much is owed. This has not been confirmed by any reliable news source.)

Other than the obvious, that this plan is unfair to people who are scraping by, taking second jobs, and doing whatever they have to do to make payments on time, it also makes no sense to me. The root of the problem is that the buyer was approved for this loan in the first place. I have to assume that the buyer isn't in trouble because they were out buying a new car, clothes, vacations, and electronics or sending their kids to private schools instead of making loan payments. I also have to assume that the buyer didn't take out a home equity loan which artificially raised the value of their home. And, I have to assume that the banks approved a loan with payments higher than the buyer could realistically afford. Why were banks allowed to do this in the first place?

Who’s watching the lenders to make sure they don’t continue to take advantage of customers by roping them in with the promise of lower costs by misquoting their payments and fees, then surprising them when it comes time to close? Why aren’t fees standardized so that the costs will be about the same between lenders? Who’s watching the fine print? Who even understands the fine print?

To fix the mortgage industry, we must fix mortgage lending practices. Mortgage companies shouldn’t be able to boost interest rates in order to make a profit. If one person can get a 5% interest rate for a primary home loan, shouldn’t everyone?

Fees should be standardized so that a borrower can not only understand what they are paying, but also so that they are the same from lender to lender.

A higher fee for a person with poor credit, or a higher fee for making a “no-to-low” down payment, should also be standardized across the industry.

Rates and fees should also be locked in for one year at no extra charge, about the time it takes to find that perfect house to buy.

“This will ruin the free market economy. This is socialism!” banks will cry.

No, this is no different than any other major purchase in life. Car dealers have to list fees and prices on the sticker and can woo customers with free oil changes for life. It’s easy to back out of what looks like a bad deal: You don’t have to make a deposit before signing for the car; you aren't locked into a loan for 30 years; and you can easily go to a different dealer to find the same exact silver Chevrolet Cavalier since cars are mass produced. Even utility companies and insurance companies must go before the Florida Legislature to justify price hikes. Credit card lending terms are written on every statement. Why can't mortgage costs be standardized?

Rather than winning over home buying customers by promising lower interest rates, fees, or payments, home mortgage lenders can promise better customer service. Your bank where you have your checking account can offer you convenience in transferring payments between accounts. Independent lenders, such as Countrywide, can offer flexible payment schedules or lower late fees for late payments to woo customers, or maybe throw in a free gift card to Haynes furniture.

There should be no surprises.

Banks are not only to blame. Florida counties and cities need to commit to listing anticipated property tax on homes for sale so you know exactly how much you will have to pay, even before you put an offer in to buy a home.

PMI? What’s the point? What good did PMI do amidst all the foreclosures. That’s one extra fee that should be eliminated entirely.

In addition, the current structure of loans sets borrowers up for failure by amortizing payments. What does that mean? The first few payments you make don't pay off your loan. Instead, they are attributed to interest. In fact, over half of your mortgage payments pay interest for the first 18-1/2 years of a 30 year loan. Crazy? Huh? No wonder so many people owe more than their homes are worth. The only way to pay less interest is to make extra payments earlier than scheduled. Wouldn't it be great if instead of paying $900 towards interest and $100 towards the loan, you paid $300 towards interest and $700 towards the loan each month from day one? After one year, you'd already have paid off $8400!

Obama wants to give an $8,000 tax credit to first time home buyers to help with the cost of buying a home to offset these costs. Too bad it's too late for the rest of us. We were all first time home buyers at one time.

I would prefer that the housing stimulus money be spent on a government regulatory agency that will standardize home loan costs for everyone. That’s the only fair way to spend tax payer money. We are one country. We are one people. We all pay taxes in one way or another. Let’s all reap the benefits of “club membership” of this United States of America.