The quick fall of the housing market and the widespread impact to the American homeowners have already prompted a long list of prompt political actions. All of them came with good purpose, but not all are rational. The often-touted rate freeze and loan-modification program, announced by the White House on December 6th, is a good example of how ridiculous some programs are designed.
Here is a quick run-down of the test that subprime borrowers need to pass to qualify for a "fast-track" interest rate freeze:
1) FICO Test: If your FICO score was under 660 when you applied for the loan, and hasn’t improved for more than 10%, you pass the test. Having too good a credit score -- say, above 660 -- and sorry, you are out of the game (for being creditworthy and therefore you don't deserve to be rescued).
2) Mortgage Status Test: The mortgage needs to be "Current": which means the homeowner is not more than 60 days behind on payment right now, and hasn't been more than 90 days late during the last 12 months. (Read: if you are already up to your neck, you don't deserve the rescue.)
3) LTV Test: Homeowner needs to have no more than 3% equity in the house. (Read: if you happened to be a rational homeowner by putting a good down-payment, you probably can bail yourself out without external help.)
4) Principal Residence Test: The property used as collateral should be the borrower's principal residence. (Finally we have something fair.)
5) Monthly Payment Test: The mortgage's monthly payment must be scheduled to increase by more than 10 percent after the scheduled reset. (Read: you are expected to tighten your belt if your mortgage payment will only increase marginally.)
One can reasonably conclude that what the program intends to help are those who were really not suitable for being homeowners, and is it our government's wish to keep them in their home even they are behind on creditworthiness and have no equity?
Now I don't even bother to point out the moral hazard involved in the bail-out (many other bloggers wrote about it better than me), and maybe I should feel good that it is a voluntary program supported by lenders and no taxpayer money will be used, but should our ownership society be built this way?