Columnist does “hatchet job” on housing rescue bill

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Sunday reading: My favorite housing columnist*, mortgage broker Lou Barnes, turns in a convincing criticism of the new housing bill this week, arguing that the ‘rescue’ for troubled borrowers makes very little economic sense for many borrowers who bother to do the math. Barnes calls his column a ‘thorough hatchet job’ on the bill.

Here’s the math, as Barnes does it: Take a borrower in a ‘bubble zone’ who borrowed $190,000 to buy a $200,000 home, using a typical product: a five-year, interest-only ARM. The house is now worth only $150,000, and under the new federal ‘rescue,’ the borrower might qualify for a new mortgage of $135,000. What’s wrong with that? Plenty, as Barnes explains.

Current payment, under the interest-only loan, is $871 a month. It’s about to jump to $1,167, which is a problem. The new payment under the federal program (a 30-year fixed with mandatory FHA insurance) would be $1,020. Better than the reset but still a big increase. Plus, Barnes reasons, the house would probably rent for $700. Plus, he reminds us, if the borrower takes the new federal deal, the borrower loses out on half of the future appreciation if the housing market recovers. Barnes predicts a borrower in this situation would simply walk away from the $1,167 reset and rent nearby for $700.

A far-out example? Barnes is a mortgage broker. He thinks it’s ‘mainstream’ and believes it explains why Americans will continue to walk away from their mortgages.

*Why I like Barnes: He knows the mortgage business -- he’s in it -- and writes an engaging, salty, passionate, timely, smart column every week about the mortgage market, the housing market, the economy and the Fed. Find his archive at www.boulderwest.com.

--Peter Viles
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Photo Credit: Treasury Secretary Henry Paulson via L.A. Times