David Lazarus of the LA Times tells the story of a couple caught up in the Obama administration’s
foreclosure-relief program backdoor bailout for Fannie, Freddie, and the banks: (via memeorandum):
The couple received a notice of default on their mortgage from Wells Fargo in August 2009. But a bank rep said there might be some hope. The Kaharas were advised to seek assistance through the Home Affordable Modification Program, a federal program intended to help homeowners by modifying loan terms.
In December, they were notified by Wells that they were eligible for a three-month trial loan modification that would lower their monthly payments to about $1,400. The Kaharas managed to make all subsequent payments in full.
After the three months were up, Ellen Kahara said, they were told by Wells that their case was still under review and that they should keep making the $1,400 payments. They did.
The bank continued requesting paperwork as part of its review process. Ellen said she called Wells on Aug. 9 and for days afterward to check on the status of their loan modification but never got a call back.
The Kaharas received a letter from Wells dated Aug. 11 saying that their application for a permanent loan modification had been rejected. The letter said the Kaharas would have 30 days to discuss other options available to them.
“Other options,” in Wells Fargoese, apparently means selling the house out from under them to a property-investment firm without any notice.
What should the Kaharas have done? From the information Lazarus provided, it appears they made the mistake, common during the boom, of taking out an exotic mortgage they could afford only if the price of their house continued to appreciate. Once it became clear that prices were headed in the wrong direction, they probably should have arranged a speedy short sale or taken the foreclosure hit. Again, I don’t know all the particulars, but it seems to me that either option would have been preferable to getting caught up in the administration’s ill-advised loan-mod scheme, which seems to have been designed to A) give people who would have been better off arranging a short sale false hope that they could avoid the loss, and B) get people who were ready to accept foreclosure an incentive, based on fraudulent premises, to keep making “trial” payments for six or seven months before pulling the rug out from under them in order to “smooth out foreclosures for banks” and help them avoid taking their write-downs all at once.
As a conservative, my preference would have been to keep the government out of this corrective cycle. Most liberals, I’m sure, would have preferred a more generous loan-forgiveness program that actually, you know, prevented foreclosures. But there should be zero ideological disagreement over the cruelty and stupidity of the program the government actually put in place, which both delayed the inevitable correction of housing prices to the detriment of the overall recovery and failed to keep people in their homes.
* Headline explanation here.