Mortgage Plan Lies of Omission

According to Fox Business News, Obama's new mortgage rescue plan will not work because it does not take into account a well known aspect of lending, namely PITI.


"Friday, February 20, 2009
It's a PITI -- Why Obama's Mortgage Plan Doesn't Work

Mark Lieberman, Senior Economist
FOX Business News

It’s a PITI.

How did so many smart people get it wrong?

The ambitious mortgage rescue plan offered by the Obama Administration appears to miss a couple of critical elements which could -- unless corrected as details emerge -- leave the plan dead on arrival, and that would be a pity.

Indeed PITI is at the root of the problem.

In mortgage parlance, PITI represents Principal, Interest, Taxes and Insurance: the components of the monthly mortgage payment. Typically, according to knowledgeable insiders, the latter two elements -- real estate taxes and homeowner’s insurance -- represent about 1/3 of the monthly payment. Lenders generally require borrowers to pay those expenses monthly into an escrow account to ensure property taxes will be paid -- or, in the event of damage, that the property (collateral for the loan) is protected.

PITI -- with some other factors -- is the numerator in the equation used to determine the target percentage of a borrower’s income under the Administration’s plan to make mortgages affordable.

The arithmetic using the examples offered by Treasury to illustrate the Homeowner Affordability and Stability Plan suggests the goal of bringing the monthly payment down to 31% of gross (pre-tax) monthly income may be illusive at best.

In addition to PITI, mortgage lenders include all mortgage payments -- including those for home equity lines of credit and home equity loans -- in computing the ratio. The Homeowner Affordability and Stability Plan, or HASP, doesn’t address those obligations.

These omissions not only could be, but are, significant.

Mortgage payments are calculated using three factors:

The interest rate,
The amount of the loan and
The length of the loan.
Tweaking any one of them could change the monthly payment -- with a different outcome."


My question is, with all these "smart" guys working on this plan, did they really miss this vital point? Doesn't everyone know that lenders take into consideration Principal, Interest, Taxes and Insurance when computing loan to income ratios? And what about PMI, Private Mortgage Insurance, which is required for loans which exceed 80% of a home's value? Will PMI be waived for these folks, or is this another oversight?

My guess is that the Obama administration did not forget these details at all. Instead, they simply knowingly failed to include them in the details released to the public, as adding in their additional cost will significantly increase the cost of the program. The spin-meisters realized the real price tag would be too much for responsible mortgage payers to stomach, but once the program is a fait accomplis, and the true cost emerges, it will no longer be front page news. People are already outraged at the thought of bailing out irresponsible homeowners. When the actual cost of this program becomes known, will they revolt, or will they simply shrug their shoulders and acquiesce to yet another slick move by our "transparent" new President?