The 31 Percent Solution?

In this country, there are about 55 million homeowner mortgages. According to the Obama administration, there are 9 million mortgage holders who are on the verge of foreclosure. If you didn't listen carefully, you would have thought that his new, $75 billion plan would help all those 9 million homeowners (See Full Story). But, in reality, those who would actually receive relief under this plan will be scant; at best. Here are my reasons.

At his press conference, Mr. Obama said that "thirty-one percent" was going to be the "means test" by which people will obtain a reorganized and reduced mortgage rate under his program. What that means is that any person receiving relief from their current mortgage obligations must have revised mortgage payments that are no greater than 31 percent of their income.

Right off the top, about 45 percent of those who are on the brink of losing their homes won't get any relief under the Obama program because they are unemployed and absolutely can't pass that 31 percent mortgage-expense-to-income means test (See Full Story).

Of the remaining 5 million homes in potential foreclosure, there are at least a million mortgages that are in the hands of former house-flippers and speculators. Generally, these are secondary or tertiary home mortgages that Obama has clearly said won't get any relief under his plan.

That leaves about 4 million remaining mortgages that "might" be eligible for relief out of the original 9 million. However, I will bet that, best case, only about half of those will actually qualify for the under 31 percent guideline. That's because at least half of those home's 4 million homeowners are so "upside-down" on their mortgages that no amount of interest rate relief will manage to get their mortgage payments below the 31 percent threshold. (By "upside-down," I mean that the mortgage amount that is owed is greater than the value of the house. In many cases, the homeowners actually have debt that is 6 figures higher than the current value of their home.).

So, now, we're down to about 2 million mortgages out of the original 9 million.

Now, here's the big kicker. It is already known that, historically, 55 percent of those receiving home mortgage restructuring will go back into mortgage default and foreclosure after 6 months (See Full Story). This happens for a variety of reasons. They lose their jobs. They have unexpected health issues. Or, simply, the other expenses in their lives continue to rise and they just can't meet all of their obligations. Also, many of those filing for restructuring actually lie about their incomes in order to get a lower rate. Therefore, it is possible that a year from now, the best we could hope for from the Obama plan is the saving of about one million mortgages. That's a far cry from the 9 million that Mr. Obama said his plan had originally targeted.

One other thing has to be considered. People are intentionally walking away from their mortgages and their homes by declaring bankruptcy because they are either being advised to do so, or they've figured it out on their own. More often than not, these are people who can easily afford their mortgage payments. But, they are so upside-down on their mortgages that it doesn't make any financial sense to continue to make those payments. For example, take someone who bought a house for $500,000 in 2007 and that house is now only worth $325,000. Maybe, originally, they mustered $25,000 in a down payment under some very liberal lending conditions of that time. That means that even if they could sell their house today, they would still owe the bank $150,000 (the difference in their mortgage commitment and their current house value). That $150,000 tab would also be applicable if they tried to refinance to lower their monthly rates. In essence, they're stuck with a problem unless or until they renege on that loan through formal bankruptcy. For most people in this situation, it is an amount of indebtedness that would take decades for them to pay off; even if the housing market did recover.

Certainly, there are some who will look at me as being both partisan and grossly pessimistic. However, I've been around a long time. Politicians never face truth. In selling anything, they always give the best case scenario; and, Obama is no different. Don't forget that this is a guy who, when running to get elected, said that his recovery plan would result in the creation of 4 to 5 million jobs. Then it was 3 to 4 million. Now...its "save" or create 2-1/2 million to 3 million jobs. My guess is that, in a month or two, the word "create" will be gone completely and we'll only be hearing about saving 2.5 million jobs.

Even if I am being overly pessimistic, my bet is still that we will only see the maximum of 1-1/2 million mortgages being saved by his plan. I will also think that he'll be back telling us that he needs to pour more money into the program in order to it to make it work. Further, my guess is that 31 percent will also have to float upward to 33 or 35 percent. I'll even venture that, sometime in the not-too-distant future, Mr. Obama will announce a program whereby the Federal government will pay to clear the upside-downedess of any loan in order to stop the still increasing rates of foreclosures.

Lastly, it's important to note that much of this "mortgage bailout" is just avoiding the inevitable. It would be better if the free markets were allowed to work and let banks renegotiate valid loans while continuing to allow the foreclosure process to go forward for those who were never qualified to be in the house they are now in. The temporary saving of mortgages is like dealing with the San Andreas fault. Having thousands of little earthquakes over time is much better than letting the pressure build up until you have one, massive one. If we keep trying to delay foreclosures, we could see a huge mortgage industry collapse in two or three years; even greater than it is right now.