Obama's worst-case "Family C" v. California's "Family Si"

Obama's mortgage bailout plan comes with a Q&A with three examples: Families A, B, and C, who all bought homes in 2006. Family A and Family B each put down at least 20% and are ineligible for the most lucrative subsidies. Family C, the worst case scenario in Obama's universe, put down 4.3% and are eligible.

Family C: Eligible for Homeowner Stability Initiative

• In 2006: Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker - Mom & Pop Mortgage - sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.

- Today: Family C has $214,016 remaining on their mortgage but their home value has fallen -18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.

Yes, indeed, that's about as bad as it got in the peak of the Housing Bubble in 2006, all righty! A two parent family put down only 4.3% on their mortgage and the value of the house has dropped a gigantic 18%. And now they are $25,000 underwater. Horrors!

• • Their loan is now 113% the value of their home, making them "underwater" and unable to sell their house.
  • Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.

Let's come up with a more realistic Family C. Or, perhaps we should call them "Family Si" because they said "Yes" to a zero percent downpayment mortgage with a negatively amortizing teaser rate in California in 2006.

Roughly half of all the dollars tied up in foreclosed mortgages are in California, so let's talk about the Big C.

Instead of buying the house for $230,000, Family Si bought it for $460,000, still under the peak median in California of over a half mil.

Instead of putting $10,000 down, they put zero down, as 41% of the first time buyers in California did in 2006.

Instead of having paid off $6000 of the principle since 2006, they got a teaser mortgage that negatively amortized over the first two years so that their loan has actually grown by $6000.

Instead of their house falling by 18%, it's fallen by 45%. So, they now owe $466,000 on a house that might be worth $253,000.

Instead of their Loan To Value (LTV) being 113%, it's 184%.

And instead of being $25,000 "under water," they're $213,000 under water.

And instead of one of the two parents moving from full time to part time work, there were never two parents in the first place. The buyer's supposed husband was her real estate agent's brother.

And instead of one parent having a full time job, it was a NINJA loan -- No Income, No Job, or Assets.

Instead of the family making something like $58,400 annually when both parents were working, the one parent's maximum income when she is working is $11 per hour or $22,000.

And instead of 42% of income going to mortgage payments, 183% of monthly income goes to the mortgage (in theory, of course, since Family Si stopped paying during the second month of ownership). [Note: I'm just ballparking the monthly payment figures off the proportional difference in debt from Obama's Family C, so from here on the numbers are just guesstimated.]

Oh, and I forgot to mention, Family Si had already bought another house the month before and was planning to flip this one for a big profit.

• Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that for five years will reduce their mortgage payment by $406 a month. After those five years, Family C's mortgage payment will adjust upward at a moderate, phased-in level.

So instead of the two year teaser loan that proved so disastrous for all concerned, Obama will give out five year teaser loans!

	Existing Mortgage	Loan Modification
Balance	$213,431	$213,431
Remaining Years	27	27
Interest Rate	7.50%	4.42%
Monthly Payment	$1,538	$1,132
Savings:	$406 per month, $4,870 per year

Quite a deal for the taxpayers -- only $4,870 per year for five years or $24,350 to save Family C's ancestral manse.

Of course, for Family Si, it would take something like $33,370 per year for five years or about $166,000 total in handouts.

And then Family Si would still default after five years because even with the government handing them $166,000 of the $466,000 they owe, their house still likely won't be worth the balance.

The bottom line is that there isn't enough money anywhere to bail out the Family Sis in the Sand States. Geithner and Summers probably know that, but does Obama? It's hard to tell from his rhetoric, which promises the moon in terms of saving the economy, but then also promises to not bailout anybody but the most deserving. If he's not willing to bail out the Sand States' Family Sis, why did he go to Arizona (California Jr.) to give his speech announcing his bail out? If he's really only going to give out $5k per year, he should have gone to North Dakota to make his announcement.

My published articles are archived at iSteve.com -- Steve Sailer