To quote presidential candidate and Senator, John Edwards, “there are two Americas, not one.”  Well of course he was referring to what he viewed as the stratification of American society between the rich and the poor.  However, his quote is very applicable to those who are so fortunate as to have a loan that is owned by the US Government – i.e. Fannie Mae or Freddie Mac.

As you may know, the Obama Administration under the lead of HUD (Housing and Urban Development) have been promoting their “Making Home Affordable” program whereby they are trying to encourage millions of property owners to try to refinance or get their loan “modified.”    One of the troubles many people were having, and continue to have is that home prices have often dropped 15,20,25,30+% since they had purchased the property and therefore it makes no sense to refi or to modify.  However, the government was quite generous by stating that you could modify your loan provided you met all of their debt to income ratios, employment verification etc., and you could get the modification at 105% loan to value.  Well now they are going to allow mods of 125% loan to value according to Bloomberg.
Can someone tell me how this is different than when people used to do cash out refi’s at 125% loan to value just 3-4 years ago?

The fact of the matter is it seems the government is trying to string out or push out foreclosures and put an even greater burden on the backs of the taxpayer.  These people getting these 125% LTV mods WILL go to foreclosure in the future and it will just be a bigger bill for the taxpayer.  Perhaps Treasury Secretary Geithner is confident the Chinese will continue to buy our debt.  He’s going to need it to be so.

Naked Capitalism does a great job detailing the program.  One of the things they note is that if home owners take the government up on its offer, the loan will go from a non-recourse loan to a recourse loan…that is to say it goes from being good for the debtor to being good for the government.  Oops.

For those of you who aren’t fortunate enough to have the US Government as the backstop or investor for your mortgage, it’s not likely you’ll be able to get the same 125% LTV offer.  Sorry.