Loan Modification

Should We Ban Millionaire Borrowers?

By Peter G. Miller

Should millionaires be able to get lousy loans?

When it was passed last year as part of the FHA reform package, the Hope for Homeowners program was a federal mortgage refinancing plan designed to help some 400,000 people who now have toxic loans. In fact, the program has been a complete bust. As of January 31st, HUD figures show that there have been 465 Hope for Homeowners applications — and not one approval from the government.

Hope for Homeowners has gone nowhere because it’s complex. It requires lenders to take a loss and borrowers to share profits and make big payments to Uncle Sam. While the intention is good, the program is just too complex to succeed.

Now we find an effort to revamp the Hope for Homeowners program and the betting here is that few FHA loans will result.

Under H.R. 1106: The Helping Families Save Their Homes Act of 2009, the program will become MORE restrictive if the legislation passes as it is now written. Huh? How can that help anyone?

Once again, the intention is good but the result is doomed to failure.

For instance, the legislation requires that a borrower does not “intentionally defaulted on the existing mortgage or mortgages.”

Translation: If you’re stuck in an over-priced house you can’t buy a replacement home and then default on house #1. This seems logical, except that when someone applies to buy that second home they have not yet defaulted on the first house. If default comes at all, it will come later.

Here’s another one: You can’t get a Hope for Homeowners loan if you have “knowingly, or willfully and with actual knowledge, furnished material information known to be false for the purpose of obtaining the eligible mortgage to be insured.”

What’s remarkable about this section is that it ought to apply to all loans. The simple solution here is to require that EVERY mortgage applications must be fully documented. That’s the case with FHA mortgage applications and one reason the program is successful. If a borrower can’t come up with some tax returns and proof of employment and income why would you give that person several hundred thousand dollars? It makes no sense.

However, my favorite section goes like this:

“BAN ON MILLIONAIRES — The mortgagor shall not have a net worth, as of the date the mortgagor first applies for a mortgage to be insured under the Program under this section, that exceeds $1,000,000.”

I’m not making this up. The bill would actually ban financially-strong borrowers from the program.

Now — just thinking out loud here — wouldn’t it make sense to get borrowers with a net worth of $1 million or more to participate in the program? You know, folks who might pay their bills and, if they don’t, could be sued by the government for any shortfall?

Think about it, why would you loan money to someone with little or no net worth? You can’t sue them if they default because there are no assets at the end of their rainbow other than the house.

But millionaires, those folks have some dollars. They can make good on their promises and if they can’t, that’s just dandy. We can discuss the matter in court.

Full post as published by FHA Mortgage Guide on March 02, 2009 (boomark / email).