Are you ready for FEMA Mortgage?

Congress and Treasury Secretary Hank Paulson are working this weekend to hash out details of the proposed $700,000,000,000 bailout during this amazing time in American history.  My brother-in-law is an adjuster for FEMA, spending months away from his home evaluating damaged property across the country.   FEMA Mortgage could be created to essentially do the same thing.

Now that Uncle Sam will be buying bad mortgages, they could utilize FEMA mortgage adjusters to evaluate the borrowers current situation:

  • Can they afford their mortgage payment? 
  • Is this a situation worth modifying their existing loan?
  • Was income over-stated or not verified with the mortgage?
  • Was the property purchased as owner occupied and it’s now an investment property? 
  • Are there signs of mortgage fraud?

Home owners in trouble who have financial ability to stay in their home, would have the opportunity to re-qualify at either a lower rate and/or reduced loan amount with a silent second that would be called due if the home owner sold the property within a certain period of time (similar to State bond programs).   This would be available to home owners who were having difficulty due to an ARM adjusting or perhaps a financial set back that is now resolved (such as temporary loss of employment).    Loan modifications with Uncle Sam owned mortgages would be streamlined, very low cost  and legit.

Home owners who could not re-qualify based on their actual income, may have the opportunity to rent a property at a payment they can afford.  Having property occupied as a rental is better than abandoned–for that home and for the neighborhood.   Perhaps Uncle Sam will start FEMA Property Management…they can even re-use some of the trailers they bought for Huricane Katrina.  

If fraud was used on a mortgage now owned by Uncle Sam, the FEMA Loan Adjuster would determine if it was caused by the borrower or loan originator and proper actions would be taken.

A plan such as this, could provide jobs for out of work Loan Originators (of course they would have to pass the National Licensing requirements) and employ Real Estate Agents, builders and contractors, too.   FEMA Adjusters could also determine which foreclosed properties, owned by Uncle Sam, need repair before it can be resold at a higher value or if they should just be sold “as is”.

Your thoughts?

72 thoughts on “Are you ready for FEMA Mortgage?

  1. This sounds like a pretty reasonable course of action. I definitely want to see accountability for those who did things wrong.

    Just because someone “wanted” (or felt they “deserved” it) a huge/nice/whatever home they really could not afford, and someone was willing to give them a loan, does not mean that person should keep that house.

    Many of us saw this coming, and the bail-out should not reward the greedy, not to mention the people who committed outright fraud. Those of us who either bought places we could afford or sat on the sidelines certainly should not be the ones to help pay for the mess that greedy realtors, home-buyers, mortgage brokers and wall street executive got us into. (I am not saying all realtors/mortgage brokers/etc. are greedy – but there are a lot that are).


  2. Check out the bailout details at Bloomberg:

    It is an unlimited (capped at $700b at any time) fund to give to the Dictator of Finance without any recourse or review. Homeowners will not be helped, but banks will. I suggest everyone buy GS stock (they will be hired by their former manager no doubt) and as many option-arm homes as possible. The free market is dead and we are the victims.

  3. From Paul Krugman: No deal

    “I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets. As I posted earlier today, it seems all too likely that a “fair price

  4. Those who cannot afford to stay in their homes … should lose them.

    Banks that lent to these losers … should take their losses.

    Institutions that are insolvent … should die.

    This plan is sheer madness, a coup, the greatest single extraction of wealth in our nation’s history.

    What a fool I was to save, rent, and live below my means.

    USA is dead.

  5. christiangustafson, re: #5
    “Those who cannot afford to stay in their homes … should lose them.

    Banks that lent to these losers … should take their losses.”

    I agree for the most part. However I believe it would be more economical if people can qualify and make payments on the home (perhaps reduced or temporary buydown–but no “free” ride..there has to be a repayment at some point) then keep them in. It’s less expensive than a foreclosure for the bank…and FEMA Mortgage (funded by you and me).

    USA is dead… sorry… I can’t agree with you there.

  6. Christian wrote: “What a fool I was to save, rent, and live below my means.”

    That’s what we’ve been trying to tell you! 😉 😀

    Seriously, I’m not really big on this plan either. I think it’s probably premature (as I thought the takeover of F&F was). The Fed/Treasury seem to be doing a lot right now to simply appease the financial markets. A 2,000 point drop in the DJIA over a period of time is not the end of the world, but they seem to treat it that way.

    That said, a collapse of the economy/financial systems wouldn’t be pretty for anyone. So I can see why they’d rather act early rather than late.

  7. Yes, if this passes, it’s clear that the US is no better than any other banana republic kleptocracy. It’s about time that our foreign creditors, the ones who keep this whole sham going, treat us as such.

    Free markets, the rule of law, worries about moral hazard, how quaint and naive in our Paulson-Bernanke world now.

    Why don’t we just let RE prices return to affordable levels, and let the chips fall where they may?

  8. I think you are missing the downside, Kary.

    It’s not just a stocks falling. That’s already happened. The thing that made them act was the credit markets freezing up again for the 3rd, (4th?) time. This time worse than ever. This pushes even theoretically solvent companies to the brink of bankruptcy, because the short-term financing they need no longer exists. Noone wants to lend because noone knows who’s insolvent.

    Personally, I think this “solution” doesn’t really get at the problem, and wastes historic amounts of money in what is likely a doomed attempt to solve a liquidity problem that is really a solvency problem.

    Calculated Risk suggests another top down approach that makes a little more sense and is far less expensive for the taxpayer.

    What I think we should do is jam the $700 billion at the bottom-end, where the root of the problem lies – mortgages.

    I suggest a massive infrastructure program, rebuilding roads, public buildings, parks, and mass transit across the country, get all those construction workers who have or will lose their jobs soon back to work so they can pay their mortgage or buy homes again.

    If we lose a a few hundred banks, so be it. Take ’em over and do the depositors right.

    But the focus should be on the little guy trying to pay his mortgage.

  9. Bili, I’d agree that might be what they’re after, but I just haven’t seen any evidence of that. As an agent I’m probably not in the best position, but when interest rates are at less than 7% and people with decent credit can get loans, it’s sort of hard to see the problem with the credit markets.

    I’ve lived through credit markets freezing up, not as a consumer (unless you count a 10.25% home loan), but as an attorney, where rather solvent business people couldn’t get credit to finish projects. That’s also something to be avoided. Maybe they have the stats showing that was starting to happen–I don’t know.

  10. Or just pay him too much to build Seattle light rail or a new viaduct tunnel (or a thousand other projects our country desperately needs across the country) , then he can pay his mortgage without restructuring.

  11. Kary – read up on the TED spread.

    We could also get all those mortgage brokers to work trying to sort out value in all these CDOs and MBSs. Something for everyody – white collar and blue.

    Any ideas how we keep all the out of work Realtors in their homes?

  12. biliruben, they can do broker price opinions for “fema mortgage” and not everyone will be able to stay in their homes (people who cannot afford the payments)–those will have to be sold.

    There are agents, mortgage wholesale account mngrs, LO’s, processors, escrow officers…etc.. who are either out of work or making too little to get by.

  13. Excellent, Rhonda! I think we about have this problem solved.

    Unfortunately we have a former CEO of Goldman Sachs calling the shots, so his ilk get the trillion, instead of those who really need it.

  14. A trillion. That’s just an unfathomably large amount of money. I just don’t quite get what a trillion is. How many pints of Maritime Salmon Bay Bitter is that, and how long would it take me to drink them?

  15. OMG christiangustafson…

    it’s not mortgage brokers. It’s “loan originators” or “mortgage originators”. People (especially the media) often use the wrong words to describe people who originate mortgages. Please don’t exclude LO’s who work for mortgage banks or correspondent lenders or credit unions. A mortgage/loan originator is a mortgage/loan originator regardless of what type of institution they work for.

    Please open yoru wallet to all LO’s and don’t just favor those who work for mortgage brokers.

  16. They’re all in the same boat, the point is that the entire FIRE economy we have built is going away for a decade or two. I was touched by the idea of a CCC-like program to employ these people, the credit-middlemen, the ARM peddlers, the HELOC pushers.

    Maybe we can use the program to re-employ the techies after 2001 as a model for these people … oh that’s right, there was no such effort.

    Deflation … successive cycles of debt default and credit contraction … with no end in sight until we find a bottom with a sustainable, practical economy.

    It is impossible to reflate the credit bubble now. The last assets for the bubble — Americans’ home equity — have been pledged and consumed. We’re just in the first stages of the endgame now.

    The last good piece Ben Stein wrote:

  17. Any way a non-distressed person with an ARM could take advantage of these lower rates? I feel like I’m being punished for not being risky enough. (Should have gotten the month-to-month ARM)

  18. Rhonda:

    The FEMA Mortgage name is brilliant. The url is taken, was that you? 🙂

    Your plan sounds very common sense, which is why it probably won’t be the plan adopted.

    Jillayne, thanks for inviting Paul Krugman in. He is by far my favorite economist and columnist, and I am SOOO sorry I did not heed his housing bubble warning way back when (2003, I think).

    Speaking of bubble, I think that we need to get to the point where the median home price is roughly 3.7 times the median income in the Seattle MSA, as that was the average from 1990 to 2000.

    Since lenders have largely returned to the standards that were in place pre-2001, that’s what will work.

    Until that happens, we cannot restore “liquidity” in the local housing markets.

    Finally, this flimsy “TARP” is being planned by the same folks who supervised the raid on our treasury of trillions of dollars, and knowingly lied to us to get us into a costly and fruitless war.

    So, do you think they will do what is right for the greatest number of Americans, or do the greatest good for the “Right” Americans?

    The answer is….?

    I guess we’ll know when we see the plan.

  19. I think this $700 billion is a waste. I am still trying to figure out how having tax payers buy all these mortgages that no one else wants is a good thing. How does this make banks continue to lend money?? Sure it frees up capital, but the banks don’t want to take the risks anymore which is the problem.

    I prefer a bottom up approach. Use the $700 billion for massive works type projects – infrastructure, parks, transportation network, BUILDING FREAKING OIL REFINERIES, etc. This will create JOBS which is what people need. Very few foreclosures are due to crazy lending, they are due to people losing jobs. The specuvestors need to be foreclosed on.

    Second, the government needs to provide stop gap lending so people who have loans can refinance. You have an ARM and want to flip it to a 30 year but can’t due to appraised values. You want to refi but can’t because the 2nd lender won’t subordinate. You have been making payments on time and great credit but can’t refi because you are self-employed and need a stated program.

    Third, provide incentives for people to buy foreclosed properties. Lower than market rates, tax incentives, financing to fix the property up.

    Fourth, put a moratorium on building these crap box subdivisions in corn fields until home inventories get to a more manageable level.

  20. Russ, you have great diction: specuvestors and “crap box subdivisons”. We have crap-box town houses in Seattle…at least in my neck of the woods.

    I’m really hoping that what ever the bail is that it does exclude mortgages for investment properties and over-stated income. If home owners used income beyond what they make, sorry–they don’t qualify and should not have a mortgage written down to their “actual” income. That would be wrong.

  21. Russ wrote: “Fourth, put a moratorium on building these crap box subdivisions in corn fields until home inventories get to a more manageable level.”

    I’ll second that. I really have to wonder what it will be like 15 years from now, when the new houses are 15 years old, and they’re competing against the houses that are 30 years old (or older). I really can’t see these boxy crammed together things holding their value, unless maybe the new houses built then are even worse.

  22. FEMA Mortgage could either allow much greater LTVs or do away with loan to values all together when helping a home owner modify their toxic mortgage. (I’m watching Ben Bernanke and Hank Paulson with the Senate Banking Committee).

  23. What would be the downside to putting a moratorium on all foreclosures through the end of the year to allow the government to work out the plan? (Which I think is good if handled properly, but highly doubt that it will be).

    I believe most of the honest troubled homeowners would prefer to stay in their home regardless in the loss of value. Why not erase all the sub mortgage loan resets, keep them at their original rate, allow people to stay in their homes, thereby reducing the amount of foreclosures on the market to stop the bleeding and help stabilize the housing market. I would not reduce the loan amounts.

    I think the bail out should be built with the “trickle up” theory.

    First, stop the foreclosures.
    second, restructure the loans.

    I understand there was a lot of fraud and that’s another story, but keeping the cashflow coming in to the banks for these troubled loans is better than taking the home back in foreclosure and losing millions and millions of dollars.

    Just my thoughts.

  24. Thanks for your thoughts, Julie. 🙂

    I don’t see issues with a moratorium…I bet that some of the banks may welcome buying a little time as well.

    This issue is beyond subprime. This is from James Lockhart’s testimony yesterday to the Senate Banking Committee:

    “They [Fannie/Freddie] bought or guaranteed many more low documentation, low verification and non-standard ARM mortgages than they had in the past. For example, for the first half of 2007, roughly one-third of the Enterprises’ new business was composed of Alt-A (less than standard documentation), interest-only, or Option ARM products, and mortgages with layered (multiple) risk characteristics vs. 14 percent in 2005. For Fannie Mae, roughly 40 percent of new business in the first half of 2007 was in Alt-A and interest-only products versus 26 percent in 2005. The quality of their holdings of private-label mortgage securities (PLS) issued by others also deteriorated. The portfolio caps restrained the size of their PLS books, but maturing subprime and Alt-A PLS were replaced by PLS from the much riskier 2006 and 2007 origination years.”

  25. Yes, Rhonda, I know that this mess is more complicated than just the sub-prime fiasco. Also understanding that this is a very complex mess…I am just addressing the basic fundamentals of where this started from day one.

    I believe that the underlying fraud by certain brokers in bundling these sub-prime loans and selling them to the investors as “federally guaranteed student loans and were safe and liquid” …plays a large role in the systematic failure. If there was no market to sell these risky loans to investors, many would never have been sold to the consumer.

    The banks themselves were defrauded. Have you seen this yet?

    SEC Charges Two Wall Street Brokers in $1 Billion Subprime-Related Auction Rate Securities Fraud
    Washington, D.C., Sept. 3, 2008 — The Securities and Exchange Commission today charged two Wall Street brokers with defrauding their customers when making more than $1 billion in unauthorized purchases of subprime-related auction rate securities. The SEC’s Division of Enforcement in 2007 formed a subprime working group, which is aggressively investigating possible fraud, market manipulation, and breaches of fiduciary duty that may have contributed to the recent turmoil in the credit markets.

    The SEC alleges that Julian Tzolov and Eric Butler misled customers into believing that auction rate securities being purchased in their accounts were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds. Instead, the securities that Tzolov and Butler purchased for their customers were backed by subprime mortgages, collateralized debt obligations (CDOs), and other non-student loan collateral.

    Go here for full Press Release:

  26. Julie, there’s fraud from Wall Street, to the loan originator to the borrower. I hope they are all prosecuted to the fullest extent of the law.

    Kary…details…details… 😉 I certainly wouldn’t want to encourage more defaults and I don’t think that having a moritorium would encourage that–nothing is being “forgiven” and payments are not being reduced.

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