Posts Tagged ‘subprime bailout’

I’m going to go with the subprime bailout theme for another post…

Meet the Jones. Recently married and planning to start a family, Jim and Mary Jones bought their house almost three years ago. Jim and Mary had good incomes and easily qualified for the loan. Mary works at a bank and Jim is a customer support center manager. The down payment (20%) was a loan from Jim’s 401K.  A year ago, Mary became pregnant, however there was complications and Nancy was born premature with lots of medical issues. Nancy’s prognosis is uncertain, and Mary felt that she had no choice but to quit her job and focus on caring for Nancy. In the meantime, the customer support center was moved to India, Jim lost his job two months ago. He found work at a brokerage but it pays 2/3’s of his original salary. They also lost their health insurance. Their savings were wiped out by having to pay back the 401K loan. Jim and Mary’s adjustable mortgage will reset in 3 months. Jim and Mary have great credit but they are behind on their mortgage payments. With both of their incomes they could have paid the higher mortgage but now they can barely afford their current payment. A recent meeting with a realtor was not encouraging, technically yes they can sell the house and get a little money back, but there is over a year’s inventory in their area.

Let’s now meet their next door neighbors, the Flemings. Patty Fleming is an event planner, Rick is a pharmaceutical salesman. The Flemings often live beyond their means. They lease flashy cars and Patty loves to shop. Patty’s nails and hair are perfect and she has them done frequently. Rick has expensive suits. They have gotten very good at playing credit card roulette, frequently transferring balances to a new card with a teaser rate. They don’t have very good credit but when they bought their house, Rick won a salesman of the year bonus and so they had cash for the 10% down payment. They are current on their mortgage. Their ARM resets in 4 months and they bought their house 20 months ago. They knew up front they wouldn’t be able to afford the higher payment, but figured they could just refinance. Now they can’t because their house is worth less than their mortage.

Who should be helped?

The Flemings have a much better chance of qualifying for the bailout, here’s why the Jones are out of luck:

  • Their FICO score is too high
  • They are behind on their payments
  • They can’t afford their current payments
  • They have equity (although it is fast evaporating)

What do you think?

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There’s been lots of media on the proposed subprime bailout. Mostly it trends towards the negative. I’ve seen so many newspaper, magazine and newspaper articles on this topic, that to single out one or two links in this blog seemed kind of pointless. Media these days is pretty homogeneous, there isn’t a ton of differentiation amoung the pundits. Here is the impressions I’ve captured.

  • Doesn’t help enough people Only people with a lower FICO score and current on their payments qualify. One article derisely called it “The one test you should flunk” (refering to the credit score), another advises “Stop paying your utility bill but pay your mortgage” (so that your FICO score becomes low enough). Additionally to qualify, you have to have little or no equity in your home and you have to prove you can’t afford the current payments but can afford the lower payments under the program. So as you can see, lots of hoops to jump through. And, by the way, investors don’t qualify either.
  • May exacerbate the housing market downturn Some critics feel that by postphoning the reset on some homeowner’s mortgages but not others, the downturn will last longer.
  • Will tarnish mortgages as an investment The investors that invested in the packaged mortgage securities bought them for a projected income. Now a government program is coming in and preventing the investors from receiving the higher income from the ARM resets. That investor may think twice about investing again.
  • Interference with natural market forces Many feel this is a natural market correction to housing prices that got too out of whack. They further blame either the mortgage brokers and the subprime borrowers for being irresponsible and planning to use furture home equity to save them.

Lot’s of anger at bailing out irresponsible homeowners out there.

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