Some Thoughts About the $75 Billion "Mortgage Relief Plan"
So President Obama "unveils" a $75 billion "mortgage relief plan", aimed at alleviating the burdens of some 9 million homeowners who might otherwise be unable to stay in their homes.
I'm going to make some simplistic assumptions/generalizations about this bill, just for ease of illustration and also because I do not have the details of who will get what.
The total package equates to an average of $8,333 per "troubled" home. How on earth is that amount going to save someone's home?
Even at a relatively low 7% rate (considered over the life of the loan), a $300,000 loan balloons into almost $720K paid (principle and interest). The incentive amounts to just ~1.16% of the total amount that will be paid.
Even if you assume a $300K loan at what anyone would consider a very good rate (both now and historically) of 5%, and amortized over 40 years (trying to provide a very low monthly payment), the total amount paid would end up being $694K - with the incentive again making up only about 1.2% of the total amount.
Now, I contend that sure, a lender might rather take a 7%/30-year (equivalent) loan and make it into a 5%/40-year loan (the payment difference is about 25% ~$2K/month vs. ~$1,500/month), and take a total loss over the life of the loan of ~$16K (that's a loss of $24K, but offset by the ~$8K "incentive") vs. a foreclosure, which might sound like it justifies the "mortgage relief".
However, I would argue that the same lender would rather take the total loss of $24K - with no additional incentive rather than suffer the loss incurred in a foreclosure, and we not spend $75billion demonstrably useless dollars.
Now, full disclosure here: I'm just taking a simple scenario and plugging numbers in. I'm simplifying and making assumptions; that being said, I really fail to see how there's any real additional incentive being offered by the amount in the "plan" that isn't effectively already there just by a given lender wanting to lose as little as possible.
And finally, as I will probably mention in every single post having to do with any "stimulus" or spending plan, bill, etc. - I have yet to have someone point out to me where any of this is Constitutionally allowed/authorized in the first place.
I'm going to make some simplistic assumptions/generalizations about this bill, just for ease of illustration and also because I do not have the details of who will get what.
The total package equates to an average of $8,333 per "troubled" home. How on earth is that amount going to save someone's home?
Even at a relatively low 7% rate (considered over the life of the loan), a $300,000 loan balloons into almost $720K paid (principle and interest). The incentive amounts to just ~1.16% of the total amount that will be paid.
Even if you assume a $300K loan at what anyone would consider a very good rate (both now and historically) of 5%, and amortized over 40 years (trying to provide a very low monthly payment), the total amount paid would end up being $694K - with the incentive again making up only about 1.2% of the total amount.
Now, I contend that sure, a lender might rather take a 7%/30-year (equivalent) loan and make it into a 5%/40-year loan (the payment difference is about 25% ~$2K/month vs. ~$1,500/month), and take a total loss over the life of the loan of ~$16K (that's a loss of $24K, but offset by the ~$8K "incentive") vs. a foreclosure, which might sound like it justifies the "mortgage relief".
However, I would argue that the same lender would rather take the total loss of $24K - with no additional incentive rather than suffer the loss incurred in a foreclosure, and we not spend $75billion demonstrably useless dollars.
Now, full disclosure here: I'm just taking a simple scenario and plugging numbers in. I'm simplifying and making assumptions; that being said, I really fail to see how there's any real additional incentive being offered by the amount in the "plan" that isn't effectively already there just by a given lender wanting to lose as little as possible.
And finally, as I will probably mention in every single post having to do with any "stimulus" or spending plan, bill, etc. - I have yet to have someone point out to me where any of this is Constitutionally allowed/authorized in the first place.
