Why Obama plan to help homeowners is a debt trap.

[dixiegrrrrl]

And no body explains it better than Denninger.

"In every state if you refinance, the resulting mortgage is a recourse loan ,
which means they can sue you for any deficiency if you subsequently default and come after any other assets (other than retirement funds - which is why you NEVER EVER raid a 401k or IRA to stay afloat!) and even try to get a wage garnishment - and they just might!

For this and other reasons nobody should ever refinance a mortgage that is in trouble without getting qualfiied legal and accounting advice. It could be the cheapest $500 you ever spend.

President Obama's original "refi" program exempted LTVs from 80-105% from PMI requirements, ostensibly as a way of "helping" homeowners. What it really did was rape the taxpayer, because such loans are very dangerous in that if there is a subsequent default the lender will, after expenses, almost always lose money, and may lose a LOT of money.

We have since discovered that the majority of "refinanced" workout loans default again, because the underlying problem is that the buyer used exotic financing to get around their inability to actually cover the fully-amortizing payment of a conventional mortgage. When faced with a fully-amortizing payment, even when restructured, they re-default because they bought through a fraudulent device - they were never able to afford the house in the first place."
http://market-ticker.denninger.net/archives/P1.html

With the planned 105 % loan to value financing, they are trying to sucker people into unaffordable houses again, re-inflate the housing bubble, and post pone the inevitable crash. Bonus outcome is even more people will lose EVERYTHING, not just houses and credit rating.
REFIs are DEBT TRAPS.

[Riley18]

1. Somewhat confused as to how the refinance will cause more defaults.

The plan the administration put forth would make the mortgage, insurance, homeowner's association fees (if any), and real estate taxes no more than 31% of the homeowner's income. In other words, it would make homeownership affordable. The only thing that stands in the way as far as I can tell is that most homes will not qualify for the Homeowner's Affordability and Stability Act because they were originally so overvalued that even with 105% of the value the banks are off the hook. This plan is only for people who are current on their mortgage. Sorry if I am referring to another program other than the one that Denninger is referring to.

[notesdev]

2. exotic mortgages are the reason why

There are millions of people out there in homes they were never able to afford in the first place; people who were fed mortgages like 'interest-only' and 'pay-option ARMs'. There's no way to make these people able to pay for homes on any sort of traditional mortgage; they just don't make enough money, and bought too much house.

So if you refi a person in such a position to a 30-year fixed mortgage, all of a sudden the payments are way out of their leagues, all the moreso because so many of these exotics were issued during the height of the bubble.

In the meantime, if they lose the recourse nature of the loan, that totally screws the borrower and turns him into a debt slave; bankruptcy is not an exit from a recourse loan, they can go after your wages and everything and anything you have.

[CoffeeCat]

3. Bingo...and what bothers me the most...

...is that our fundamental problem isn't that people need to refinance. As you said, many
of these people couldn't afford these homes in the first place. They only way they were
holding their heads above the water--was because the creative financing gave the illusion
of affordability. So, I'm not getting why it's even helpful to continue enabling these
people. They still can't afford the payments. They still are in too much debt.

The problem isn't refinancing--the problem is that people are overextended and the economy
is going to hell. People could live dangerously, paycheck to paycheck, a few years ago.
They could hide the fact that they were on the edge--paying a huge mortgage, tons of
credit card debt and a couple of $40,000 SUVs that were financed for seven years each.

Unemployment has been like a vivisection. We now see the inner workings of the guy down the street.
He loses a job and we see that he's really poor--even though he's got a $2,000 grill in his backyard and a huge home.
It's just not as pretty on the inside, as things look on the outside.

Besides unemployment, we've got a huge portion of the workforce taking pay cuts, furloughs
and reduced overtime and hours at work. Benefits are being cut, health insurance dropped and
some companies are no longer adding to 401ks and pensions.

Living on the brink--is no longer as easy.

Unless this economy starts creating more good-paying jobs--and we quit hemorrhaging jobs and
cutting pay/benefits--it doesn't matter if people "refinance" or if credit-card companies
lower interest rates or other band-aid approaches.

[dixiegrrrrl]

4. Well put.

[sendero]

5. Bingo..

... there is debt to unwind at every level. There is no easy way to do it, despite what Obama's economic team want to tell you.

I'm convinced we are in a downward spiral that will take many many years to unwind, and there is going to be plenty of pain.

The fact that our government wants to sell us that there is a painless way out of this makes me unhappy, because they are just making it worse.

[Crewleader]

6. k&r

[chill_wind]

7. K & R. n/t