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.

Minorities or Flippers?

My husband and I got into a heated argument with my neighbor over politics outside a popular Central Florida movie theater Sunday afternoon. My neighbor, who had just rolled in on his Segeway with his young son to catch the dollar movie showing of “Get Smart,” noticed that I was wearing an Obama Biden t-shirt. The neighbor, still perched on his Segeway, rolled us into a corner and began to pick a verbal fight. He started off by theorizing that the election was fixed for Obama to win.

“Fixed?” we asked.

“Acorn. He’s got Acorn in his pocket. That’s what, 20% of the votes?” the neighbor said.

“Huh?” we wondered. The neighbor spoke with such conviction and belief, yet this was the first we’d heard of such a conspiracy theory.

“You’ve heard of Acorn?” he asked.

“Well yes,” we both agreed.

“I know it’s a non-profit,” said my husband, “but I don’t know what it is exactly.”

“I don’t know where you get your information, but I’ll look it up when I get home,” I promised, and began to leave. 

I found out later by researching on the internet that Acorn stands for “Association of Community Organizations for Reform Now.” Their mission statement explains that they are the nation’s largest community organization of low and moderate income families, working together for social justice and stronger communities. Acorn’s current campaigns include helping homeowners facing foreclosure; assisting with Gulf Coast recovery after hurricanes ravaged the area; immigration; advocating for workers to get a living wage and paid sick days; and increasing voter participation in elections.

The latest anti-Obama spin, which I was able to only find on Christian, conservative and “right-to-life” websites, claimed that Obama was single-handedly guilty of causing the mortgage meltdown because he had worked with Acorn. Acorn had advocated to help low income, moderate income, and minority families get loans when old standards disqualified them. The connection between Obama and the crisis on Wall street is a stretch, at best.

Acorn was not the only advocacy group to assist minorities in getting loans. A Massachusetts Community and Banking Council (MCBC) report from June 2004 studied the rate of home loan denials and found that as recently as 2002, blacks were denied loans about two-and-a-half times more frequently than whites. The 50 Banks participating in the MCBC agreed to take a “second look” at denials to ensure that fair lending procedures were followed. However, no special exceptions would be made in granting loans to applicants who do not qualify. Low credit scores continued to be the primary reason for denial.

But my neighbor wasn’t done, yet, and he asked me, “Tell me this. What did you think of the bailout?” 

“You mean the latest one?” I asked, “The $700 billion bailout?”

“Yes, the one this morning,” he said. 

“Well, I didn’t think they had a lot of choice, this late in the game,” I said, “They had to do something.”

“Well, I didn’t like it,” he said. “You know, I’ve been waiting for this. All those Fernie mac loans defaulting – “

“You mean Freddie Mac and Fannie Mae?” I asked. 

My neighbor was confusing the $200 billion bailout of Freddie Mac and Fannie Mae on September 7, which Treasury Secretary Henry Paulson of the Bush administration did independently and without oversight, to the more recent $700 billion bipartisan bailout agreement of Wall Street on September 28, geared to save banks from collapse who have extended credit for everything from student loans to home loans to investment capitol needed to start a business.

“Yeah, just call ‘em Fernie Mac and you’ll know what I mean. Which are mostly to minorities –"

“No, there aren’t enough minorities in the entire country to encompass all of those loans,” I said, “Maybe there’s 10 % minorities in the overall population.”

My neighbor pondered this and agreed, “That’s true. Where I come from, you don’t see many.”

I checked the facts and the numbers are: 24% of the US population is comprised of minorities, according to the 2006 census. 

“And my loan is insured by a Fannie Mae/Freddie Mac program,” I said, “In January, when I qualified for the loan, I didn’t have to pay a down payment. But by the time May rolled around when I actually found a house to buy and closed, not only did I have to put money down, the rates went up. Plus, I now have to pay PMI (Private Mortgage Insurance), not because of anything I did, but because of what other people did,” I explained. My PMI payments add an extra $100 per month to my mortgage.

Freddie Mac and Fannie Mae are government sponsored private businesses who underwrite mortgages written by the banks which grant the loans. You can actually buy stock in both companies and many stockholders are located overseas.

According to a July 11, 2008 New York Times article, $12 trillion has been loaned out as mortgages to borrowers in the United States. Freddie and Fannie currently "own" $5.2 trillion in loans, which is slightly less than half of the total $12 trillion total.

Of the $5.2 trillion, $3.5 trillion of that amount is in guaranteed mortgages. The other $1.7 is in unsecured debt, according to a Sept. 11 Bloomberg news article.

Only 1.15% of Fannie Mae loans have defaulted, according to a July 23 Bloomberg news article which paints a very descriptive picture of the eleventh hour before Fannie and Freddie theoretically crashed.

I was unable to find any statistics on the percentage of loans that were taken out by minorities, nor the percentage of their default rate compared to those of whites. However, I do know that after searching high and low for a house to buy in Florida, only one of the 72 foreclosed homes I looked at were owned by names which implied them to be of Hispanic or Asian descent. In fact, most of the homes on the foreclosure list in January were owned by “flippers,” individuals who mostly reside in other states, bought up several homes at once, usually by not paying a down payment, then attempted to resell the homes quickly at a higher price as the housing market increased at a record pace. When the price of the homes escalated to the point where an ordinary buyer could not afford them, that's when the flippers were left holding the keys. Consequently, the banks were left holding the loans with little to no hope of repayment. Banks tried to sell the homes, but discovered that the values they were basing the loans on were imaginary – falsely inflated by the excitement of speculative flippers.

My landlord, who lived in New York and had a name indicating Italian descent, was a perfect example. My property manager said that “he is in trouble” and “still owns over five houses he’s trying to sell in this county alone.” He bought the house I was renting on spec from a developer for $339K in late 2006. He sold it at a loss for $210K in 2008 after the developer lowered the prices on identical new homes – that’s when I had to move. 

I then bought a house listed as a short-sale, or “pre-foreclosure” sale. The man who owned it was also not a minority by any stretch of the imagination. He was a native Floridian, had been given the house by his parents and borrowed against it to fund a business enterprise which unfortunately failed, thereby requiring him to sell his assets. 

In fact, I only know one individual personally who has lost their home to foreclosure in the past three years. My friend Shelley is not a minority, unless you consider being a woman as being a minority. She lost her home after her mother, the primary breadwinner in her family, died unexpectedly due to a flesh-eating bacterial infection. 

The belief that only minorities are defaulting on their mortgages is just another symptom of our racist and prejudiced population. In fact, Florida law still prohibits Asian immigrants from buying homes in the state of Florida, per the Florida Alien Land Law of 1926. Voters will have an opportunity to repeal this law in the November election.

My neighbor continued with his argument.

“I’ve been watching the real estate market and waiting for the homes on the beach to come down to the right price so I can buy them up. I want them to come down to $50,000, but they’re not there, yet. This messes me up,” he said.

“Oh, you want to flip them?” asked my husband.

“Yeah, but they’re not low enough, yet,” he said, “And now they never will be ‘cause of the bailout.”

We argued extensively about other issues, everything from the details of the bailout to whether or not John McCain lied when he said he was not planning to attend the debate on Friday. In the end, the movie was starting and my neighbor wanted to go. We let him have the last word, but it made no sense.

You always know you’ve won an argument when your opponent resorts to shouting nonsensical blabber.