President Bush wants to help the struggling homeowner. One element of his proposed plan will really help those facing foreclosure and most likely keep them out of bankruptcy. He is proposing (from Inman News):
“If the bank modifies your mortgage and forgives $20,000 of your loan, the tax code treats that $20,000 as taxable income,” Bush said. “When your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes.”
This is a smart way to help struggling homeowners. Bush is right, if you’re facing hardship then you most likely will not be able to pay that higher tax bill. Now you have a potential tax lien and much higher taxes. This can force folks into bankruptcy.
The part about risk based pricing in Bush’s plan is only common sense. FHA tends to approve those that meet guidelines per a fixed pricing model. However if you’re a worthy candidate in so many other respects but do not meet the guidelines then you’re out of luck. However, in a risk based system, you’d be eligible with a higher interest rate. This only makes sense. Again from Inman News:
Bush also called on Congress to pass an FHA modernization bill that would allow the administration to expand risk-based pricing, reduce down-payment requirements on loans it guarantees, and raise loan limits in high-cost states like California and New York from $363,000 to $417,000.
I also like the idea about raising the loan limit in places like California and New York. However, I’m not so sure about reducing the down-payment requirements. It would make housing more accessible but at the same time encourages folks into thinking that they can buy something with no money out of pocket. I don’t know if that is necessarily a good thing. In the long run making people have a little bit of a stake in their purchase probably will help them in the long run.
Overall, Bush’s plan is to be welcomed. It helps the homeowner but not the lenders. The lenders and Wall Street investors took a business risk and they’re paying for it now. There is no need for them to be bailed out, however, for those homeowners who may have been ill advised on their mortgage options and placed in unsuitable programs Bush’s plan is very likely to help.