Obama’s Refi Plan for Upside Down Homeowners… Should you be excited?!

The President recently released plans for a $5 to $10 billion refinance plan for “responsible” upside down home owners. Obama’s plan would target about 3.5 million homeowners and give them a chance to take advantage of historically low interest rates for borrowers who owe up to 140% of what their home is worth.

What is ironic to me is that homeowners are excited about it, but banks claim they are opposed.

I can’t tell you how many times as an agent I have helped a buyer find the “perfect” home, only for them to quibble back and forth with the seller over $10,000 or less in price. But fast forward to 2012. That buyer now owes $500,000 but the home is only worth $360,000, and the home buyer is soooooo happy he gets to pay the $500,000 price if he can get a 4.0% 30-year fixed rate. Huh?! I am very sure that if when he bought the home the seller told him he would give him a great rate if he only increased his offer by $140,000 he would have laughed and told the seller to pound sand… but today Obama is doing him a favor? Today over paying by as much as 40% is “responsible?”

Why would someone do that when they could simply short sell the home, and in a couple years buy a VERY similar home for $360,000 and also get a very low interest rate?! Frankly, if a borrower never pays late, and short sells, they can immediately buy again right after a short sale, acquiring FHA financing. Wouldn’t that make infinitely more financial sense?

Who SHOULD be excited about the plan are the banks. After all, they have an under-secured asset with a high probability of default, and now, the government wants to buy the loan off their books–so it becomes the tax payer’s problem if there is a default. (To be clear, the plan calls for bank loans to be refinanced into government insured FHA loans). “Responsible” tax payers should be up in arms over this proposal. It amounts to a massive subsidy to the banks, a frightening liability to the government, and no real long term financial benefit to home owners.

To the middle class, home owners or not, I ask the question: How is it that government efforts to artificially prop up the price of owning a home a benefit to you?! If instead of talking people into loan mods and refinances that require homeowners to dramatically over pay for their home, instead of subsidizing ALL lending in this economy, we let prices fall to what the market would actually bear (and thus the average price of a home dropped 50%) please explain how this is bad for you. Wouldn’t you rather be able to buy a 3 bedroom 2 bath house for $250,000 instead of $500,000? Wouldn’t that make it possible for you to work less, retire earlier and spend more time with your kids?

There is only one group of people that benefit from artificially high, subsidized home prices. It is the large financial interests that created this debacle and continue to rake in billions through its dismantling. (You do know that Freddie Mac executives have made billions betting against their own loan portfolios—helping to explain their own disastrous handling of their impaired assets…but THAT will be another blog!)

For those of you that agree with me, do not worry. Obama is not serious about this proposal. It is only for political posturing in an election year. He knows the money is not there to fund it. If he meant it, his proposal would have been longer than a lousy 10 pages! But this was enough to get him his headlines, his sound bites on TV. Mission accomplished.

(For the record: I do not have a special grudge against Democrats or Obama. I have equal vehement criticism for the policies of both parties!)