Allow me to rant for just a moment. This week President Obama hatched what he calls the “Making Home Affordable Refinance and Modification” program. Apparently the historic plunge in real estate values hasn’t made homes affordable, so he has a program that will in theory stabilize home values. We here at The Two Wise Acres’ School of Real Estate Investing (impressive, I know) are baffled at how slowing the fall of home prices will make them more affordable. I mean, exactly how does using our tax dollars to artificially prop up the price of an asset make the asset more affordable? But then again, we thought Joe the Plumber asked a very good question. Then Senator Obama promised to spread the wealth, and here we are.
With that rant out of the way, let’s look at the Home Affordable Refinance and Modification program and the potential impact on real estate investing. There are two components to the Making Homes Affordable plan, a refinance program and and a loan modification program. The refinance program simply involves Freddie Mac and Fannie Mae buying loans even if they represent up to 105% of the appraised value of the home. The idea is to allow homeowners to refinance into low rate fixed mortgages who, because of the drop in the value of real estate, wouldn’t otherwise be able to refinance.
Granted, a really good argument could be made that Fannie and Freddie are mistakes in the first place. But if the government is going to be in the business of buying mortgages, this change to allow refinancing doesn’t bother me much. It’s the loan modification program that is the real problem.
Why the Mortgage Modification Program is a Bust
The modification program is a complicated beast. It involves lowering the interest rate on mortgages to as little as 2% and extended the terms up to 40 years so that the homeowner’s monthly mortgage payment is no greater than 31% of their monthly income. But wait, that’s not all! You also get a free set of steak knives, a $49.95 value! Ok, you don’t get steak knives. But what homeowners will get is up to $5,000 over five years paid directly to their mortgage company to pay down their mortgage. Where does the $5,000 come from? Uncle Sam, also known as the government, also known as you and me.
That’s right, the government is now going to pay people to stay in their “American Dream.” And we also are going to pay the mortgage companies that agree to modify the loans in the first place. Happy times are here again! All of these handouts add up to $75 billion, which a long time ago was a lot of money.
Real Estate Investors are Evil
So what does this have to do with real estate investors? Plenty. To begin with, neither the refinance nor the modification program apply to investment properties. That’s fine, but it’s the stated reason why that really toasts my 1031. Here is how HUD Secretary Donovan described the situation on Face the Nation:
We have designed this plan to make sure that the folks who did take advantage of people — whether it was lenders or speculators or flippers — that they’re not eligible for this plan,” Donovan told host Bob Schieffer on CBS News’ Face The Nation. “We’re going to have a very strict program to make sure that people who participate are what they say they are. We’re not going to benefit those who took advantage before.”
So now real estate investors are all evil speculators and flippers who take advantage of people and are not what they say they are. Thank God we have the government to figure all this out for us and protect us from these evil people.
FYI, Mike and I are NOT flippers. We tried to flip the last HUD foreclosure we rehabbed, but nobody would buy the damn thing.
Why can’t the Obama administration simply say the program is for owner-occupied homes? Why are real estate investors now speculators and people who take advantages of others? Do Mike and I take advantage of others when we risk our capital to buy a crappy looking home, fix it up, and rent it at a reasonable price? I can tell you that the neighbors who have had to look at the dump sit there for months or longer are thrilled when we buy it and fix it up.
And furthermore, it’s been real estate investors that have been buying many of the foreclosures over the last 12 months. If it weren’t for investors, the current housing market would be a lot worse than it is. Did speculators contribute to the housing bubble? Of course they did. And some of these speculators are called homeowners!