From Business Insider:

Mortgage expert and one-time Fannie Mae Chief Credit Officer Edward Pinto blasts the claim that 500,000 homeowners have entered into HAMP (Home Affordable Modification Program).

Based on comments being made by industry participants and program results to date, HAMP is rapidly becoming: I will pretend to modify your loan if you pretend that you will make the payments.

While it’s admirable to try to get large numbers of people involved in programs to “save” their home from foreclosure, it’s also known to those who have worked with people in foreclosure that it is difficult to get paperwork completed in a timely fashion. The 3-5 month trial window allows some “extend and pretend” but I fear this article is correct in stating a very significant percentage of those homes aren’t going to be saved, foreclosure is just going to be delayed.

So, What’s it mean?
I’m guessing it’s designed to calm everyone down as we pass that “100 banks seized” number and prevent any possible bank runs. After all, she does say that it’s unlikely your bank will have to be taken over. Should have put some emphasis on the YOUR, one of MY banks already bit the dust. She did place emphasis on what happened in the S&L crisis with 500 some odd institutions having been taken over, so we aren’t close to that number yet, but financial institutions tend to be quite a bit larger now. 5 times larger? I don’t know.

But, FDIC is backstopped with the Treasury, who is also backstopping all the really big banks and some major automobile companies and Fannie Mae and Freddie Mac, so we’ll be fine. Or probably be fine.

With lots of news about loan modifications and lenders not modifying loans at the rate some people think the lenders should, I started thinking once again about what makes a loan affordable. There is a percentage of borrower gross income that lenders generally consider sufficient for making a loan affordable, the percentage range is from 31 to 38 percent of the borrower’s income. The housing payment will be calculated including loan Principal, Interest, real estate Taxes and house Insurance which is commonly abbreviated as PITI. Taxes and Insurance will vary by area, Interest rates are fairly uniform throughout the U.S. and Principal repayment is usually based on a 30 year fixed rate loan.

So let’s get to affordability on a $300,000 loan, which might be higher or lower than common loans in your area.
$1,703.37 Monthly Principal and Interest @ 5.5% interest rate
$390.63 Monthly Real Estate Taxes $375,000 property value @ 1.25% annual tax rate
$75.00 Monthly Insurance based on $900 annual policy
$2,169 Total Monthly Payment (PITI)

Required Monthly Gross Income to Afford
$6,996.77 Borrower Gross Income @ 31% Qualifying rate
$5,707.69 Borrower Gross Income @ 38% Qualifying rate

It seems pretty reasonable to me that a borrower qualifying at the 31% rate should be able to afford the home, they’ll have $4,827 pre-tax income left over after making that house payment every month. Things will be a little tighter for the borrower qualifying at that 38% rate. They’ll only have $3,539 pre-tax income left over, which is just about $1,300 less than the 31% borrower.

So what happens when you take an area like Southern California where values hit the $700,000 range for moderate housing in the coastal parts of the state and many borrowers were using stated income loans? For any new loans, including loan modifications, they’ll have to hit those percentage numbers. We’ll use a single $700,000 loan.

$3,974 Monthly Principal and Interest @5.5%
$729.17 Monthly Real Estate Taxes $700,000 @1.25% annual tax rate
$150.00 Monthly Insurance based on $1,800 annual policy
$4,853.17 Total Monthly Payment (PITI)

Required Monthly Gross Income to Afford
$15,655.39 Borrower Gross Income @ 31% Qualifying rate
$12,771.50 Borrower Gross Income @ 38% Qualifying rate

I believe the concept of making home affordable is to make sure borrowers are only paying 31% of gross income if a loan modification is being considered, so I wonder “Are there really that many families bringing in just about $188,000 every year in SoCal?”. The greatest probability is most loan mods won’t be viable in Southern California and the foreclosure rate will remain elevated for the foreseeable future.

HousingWire reports:

Higher-priced houses are taking a greater share of foreclosure activity, with houses priced in the top tier accounting for nearly one-third of all foreclosures in July 2009, according to new data from Zillow.com.
“Top-tier” homes in terms of local values accounted for 30% of foreclosures in the month.

Houses in the bottom third and middle third of values took an equal share — 35% each — of foreclosures in July, while the highest tier of values claimed the rest.

Compared to 2006, top-tier homes now make up nearly twice the proportion of foreclosures, according to Zillow.com. At the height of the real estate bubble, properties in the lower one-third of home values made up 55% of all foreclosures, while homes in the medium range accounted for 29%. The top one-third represented only 16% of foreclosures, according to the data.

The points were made that Option Arms still have not reached their peak recast point so those numbers are still rising and a significant percentage of subprime borrowers have already suffered foreclosure. I’d expect similar percentages to continue into the immediate future as job losses and property value losses will continue to impact higher value homes.