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Obama`s Worst-Case "Family C" v. The Real World`s "Family Si"
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February 19, 2009, 06:07 AM
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Obama`s mortgage deadbeat bailout plan comes with a Q&A with three examples: Families A, B, and C, who all bought homes in 2006. Family A and Family B each put down at least 20% and are ineligible. Family C, the worst case scenario in Obama`s universe, put down 4.3% and are eligible.
Family C: Eligible for Homeowner Stability Initiative
  • In 2006: Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker - Mom & Pop Mortgage - sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.
- Today: Family C has $214,016 remaining on their mortgage but their home value has fallen -18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.
Yes, indeed, that`s about as bad as it got in the peak of the Housing Bubble in 2006, all righty! A two parent family put down only 4.3% on their mortgage and the value of the house has dropped a gigantic 18%. And now they are $25,000 underwater. Horrors!
    • Their loan is now 113% the value of their home, making them "underwater" and unable to sell their house.
    • Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.
Let`s come up with a more realistic Family C. Or, perhaps we should call them "Family Si" because they said "Yes" to a zero percent down negatively amortizing mortgage in California in 2006.

Instead of buying the house for $230,000, Family Si bought it for $460,000, still well under the median in California in 2006.

Instead of putting $10,000 down, they put zero down, as 41% of the first time buyers in California did in 2006.

Instead of having paid off $6000 of the principle since 2006, they got a teaser mortgage that negatively amortized over the first two years so that their loan has actually grown by $6000.

Instead of their house falling by 18%, it`s fallen by 45%. So, they now owe $466,000 on a house that might be worth $253,000.

Instead of their Loan To Value being 113%, it`s 184%.

And instead of being $25,000 "under water," they`re $213,000 under water.

And instead of one of the two parents moving from full time to part time work, there were never two parents in the first place. The buyer`s supposed husband was her real estate agent`s brother.

And instead of one parent having a full time job, it was a NINJA loan — No Income, No Job, or Assets.

Instead of the family making something like $58,400 annually when both parents were working, the mom`s maximum income when she is working is $22,000, or $11 per hour.

And instead of 42% of income going to mortgage payments, 183% of monthly income goes to the mortgage (in theory, since they stopped paying during the second month of ownership). [Note: I`m just ballparking the monthly payment figures, so from here on it`s just guesstimated.]

Oh, and I forgot to mention, Family Si had already bought another house the month before and was planning to flip this one for a big profit.

  • Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that for five years will reduce their mortgage payment by $406 a month. After those five years, Family C`s mortgage payment will adjust upward at a moderate, phased-in level.
So instead of the two year teaser loan that proved so disastrous for all concerned, Obama will give Family Si a five year teaser loan!
Existing Mortgage Loan Modification
Balance $213,431 $213,431
Remaining Years 27 27
Interest Rate 7.50% 4.42%
Monthly Payment $1,538 $1,132
Savings: $406 per month, $4,870 per year
Quite a deal for the taxpayers — only $4,870 per year for five years or $24,350 to save Family C`s ancestral manse.

Of course, for Family Si, it would take something like $33,370 per year for five years or about $166,000 total in handouts.

And then Family Si would still default after five years because even with the government handing them $166,000 of the $466,000 they owe, their house still likely won`t be worth the balance.