Where Obama’s mortgage bailout will go

Instapundit links to this interesting article:

The beneficiaries of taxpayer charity will be highly concentrated in just five states – California, Nevada, Arizona, Florida and Michigan. That is not because the subsidized homeowners are poor Californians with $700,000 mortgages are not poor, but because they took on too much debt, often by refinancing in risky ways to “cash out” thousands more than the original loan. Nearly all subprime loans were for refinancing, not buying a home.

It turns out that the five states with by far the highest foreclosure rates have some things in common with each other, but very little in common with most other states.

I studied the latest available figures for state foreclosure rates, changes in home prices over one and five years, existing home sales, the percentage of mortgages that are underwater, and unemployment. Then I compared figures for the five most foreclosure-prone states with New York and also with the 25th-ranking median state.

One out of 76 homes in Nevada went into foreclosure in January, for example, compared with one out of 173 in California, with Arizona and Florida close behind. In New York, by contrast, only 1 out of 2,271 homes went into foreclosure.

Of course, real estate speculators existed in every state. Some of them doubtless did not realize that leveraging up to buy a house that one does not plan to live in for many years is about as wise as leveraging up to buy stock that one does not plan to live in for many years.

Certainly, those home-owners are just as sympathetic and deserving of a bailout as all those who borrowed tens or hundreds of thousands of dollars to buy stock.

11 thoughts on “Where Obama’s mortgage bailout will go”

  1. From what I’ve read about part of the plan, I don’t think I agree. If I understand it correctly, approximately half the plan is for homeowners whose home values still exceed their mortgage, but do not make the 20% equity requirement for refinancing.

    With 50% devaluation off the peak, for most bubble buyers in the land of milk and honey, that sounds impossible.

  2. Conformation of my hunch:

    “The MBA wants to get rid of that 105 percent cap, or at least make it higher. The places with the greatest number of late payments are the places where prices have fallen farthest — California, Nevada, Arizona, Florida, Ohio and Michigan. “Many borrowers in these areas would be precluded from the benefits of the HASP refinance program if the (loan-to-value) ratio on their loan is over 105 percent,” the MBA says in its letter to the Treasury and Housing secretaries. …”

  3. tdaxp – that the benefit will be concentrated in just 5 states. That part of the plan, which I think is about half the 75 billion, will be highly non-concentrated in those five states.

    Which is why the MBA association is arguing to lift the 105% cap – so they can get the plan into the 5 states.

  4. I am also curious about Michigan. Is this a result of the decline in the auto industry or the result of house flipping scams.

    I know that a few years back, there were groups of people who would buy houses in Detroit neighborhoods and keep selling them to each other, for prices that were at the top of what appraisers could possibly allow. Each sale raised the appraisals in the neighborhood so that the next sale would be for more than the last. Eventually, they would do a big cash out mortgage on each house and let it go into foreclosure. Then they would create another bunch of false front corporations and do it again.

  5. sonofsamphm1c,

    Excellent catch!

    I don’t know what source the Post article uses for its table — if we had that, it may be straightforward to calculate the percentage of homes that are behind and aren’t more than 105% leveraged.

    Your point sseems to be hinted at in a later Post article: [1]

    Also, Obama’s plan calls for the government to help lenders push borrower’s income-to-debt limits down to 31% of a household’s pay for a cut-rate refinancing. But if you look at California’s median income versus recent average listing prices of $633,000 statewide, you see that 31% is an unrealistic goal (It’s even worse deal for New Yorkers, by the way!).

    Again, great catch!

    Mark in Texas,

    I am also curious about Michigan. Is this a result of the decline in the auto industry or the result of house flipping scams.

    Or how much in the decline of rural Michigan generally. My family has ties to northern Michigan, but the economic wasteland really prevents any immigration into the area unless one is a gentleman of leisure.

    [1] http://www.nypost.com/seven/02212009/postopinion/opedcolumnists/why_california_is_worth_saving_156294.htm

  6. tdaxp, the whole thing is just freaking immense. California buyers who bought about 14 months ago could get in on it. They bought severely devalued homes that kept right on devaluing. If they paid 20% down on an F&F as their primary residence, and have since lost all or part of their equity, they would be eligible. But those people are not really speculators or flippers.

    This website allows you to do some interesting comparisons:


  7. sonofsamphm1c

    I agree the real estate bubble was very large. I knew at least two people, in Iowa and one in Nebraska, who had come out to the midwest because of the prohibitive prices of homes in California. Of course, many many more in California simply rented.

    As to “speculators,” I suppose you can define two classes of home buyers:

    a) those who bought their house on sentiment with the expectation of living in it for a very long time.
    b) those who bought theri house in part because of their speculation that the price would go up

    For the first class, being “underwater” of course does not matter. Their house is their house, their payment schedule is determined, and the housing market in 30 years times doubtless will be very different than it is now.

    For the second class, being “underwater” implies a disasterous miscalculation in their speculation. Part of this group is who Obama’s mortgage bailout is expected to help.

    Thanks for the link. It’s interesting that it shows home appreciation in Nebraska, South Dakota, and Iowa. Apparently, not participating in a speculative bubble helps!

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