A16 Economy & Business
he government has bailed outWall Street firms, giant banks, creditors of
EZ SU
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A mortgage proposal to help people who did things the right way T
FannieMae and FreddieMac— and is trying to bail out people who’ve defaulted or are about to default on theirmortgages. But let’s say you’re part of a
hardworking family that has done nothing wrong except buy a home when the housing bubble was at its peak a few years ago. Yourmortgage is now way underwater, but you’re still making payments because you want to stay in your home— and you’re honorable. You’re paying for everyone else’s bailout, but because you have no equity in your house, you can’t refinance to take advantage of the ultra-lowmortgage rates that Uncle Sam’s bailout strategy has produced. To use the technical term, you’re being screwed. Enter Keith Gumbinger, a
leadingmortgage expert, with an interesting proposal for how the government can help you, help the housingmarket and even help whoever owns your mortgage. Gumbinger, a vice president at the HSH Associates mortgage consulting firm, wants the federal government to issue what he calls “value gap coverage.” It would reduce your interest payments, reduce your incentive to walk away from yourmortgage and show that behaving well doesn’tmake you a sucker.
ALLAN SLOAN
You get lower payments, preserve your credit rating and save your pride by not becoming a deadbeat.
“This is for people who are
underwater on theirmortgages but still current on themand have every intention of remaining so, and hope to remain in their homes for the foreseeable future,” says Gumbinger. “These people are being compelled to pick up the tab for reckless borrowers and failing banks, and get absolutely no help fromanywhere for themselves. How about a reward for doing the right thing for a change?” Letme show how this would
work, using HSH numbers that I’ve rounded for simplicity’s sake. Say you bought a house for $350,000 in July 2006—those were the days of 100 percent
financing, so you borrowed $350,000 on a 30-year, fixed- ratemortgage at 6.8 percent. The house is now worth $280,000, but yourmortgage balance is $334,000. The current rate for a 30-year, fixed- rate loan, if you could get one, is 4.7 percent. Under Gumbinger’s plan,
you’d get a new $280,000 mortgage at 4.7 percent, and the government would guarantee the other $54,000, on which you’d pay 4.7 percent interest to the currentmortgage holder. This would reduce your payments by $6,700 a year, or roughly 25 percent. Your mortgage holder wouldn’t have to take a write-down, because the shortfall would be guaranteed by Uncle Sam. You get lower payments, preserve your credit rating and save your pride by not becoming a deadbeat. The government is probably
on the hook, in one way or another, for some of your shortfall now. This way, everyone gets breathing space for the homemarket to recover. The government’s exposure would shrink over time as house prices began to risemodestly (or so we hope) and your payments gradually reduced the principal on your loan. You wouldn’t have any equity in your house until itsmarket value exceeded the loan balance plus the government’s guarantee. But
then again, you don’t have any equity now. Gumbinger says there are
many differences between his proposal and the government’s latestmortgage-relief effort, including the fact that theirs requiresmortgage holders to take a write-down and his doesn’t. You can find Gumbinger’s detailed plan, with the fees he proposes to cover costs, at
www.hsh.com/ ValueGapRefi.html. Sure, this plan isn’t perfect.
Among other things, we’d have tomake sure people didn’t immediately sell their house, stick the government with the $54,000 bill, then buy another house with a low-down-payment FHAmortgage to reduce monthly payments and have all the equity upside. But Gumbinger’s idea strikes
me as a better place to start than current restructuring programs, which sound great but somehow don’t seemto work out. Howmuch would this cost
the government?Who knows? But it has to be cheaper financially and socially than leavingmillions of honorable homeowners at higher risk of foreclosure and forcing themto pay above-market rates on underwater loans.
asloan@fortunemail.com
Allan Sloan is Fortune magazine’s senior editor at large.
THURSDAY, SEPTEMBER 9, 2010 Warren meets with Obama BY BRADY DENNIS Elizabeth Warren slipped qui-
etly into Washington on Tuesday to talk with President Obama about thepossibilityof leadingthe new Bureau of Consumer Finan- cial Protection, according to peo- ple familiarwiththemeeting. An administration official,who
spokeontheconditionofanonym- ity because the visit had not been publicized, acknowledged that Warrenmet with Obama but not- ed Wednesday that the president is considering multiple candi- dates for the job. Other contenders have
emerged—namelyAssistantTrea- sury Secretary Michael S. Barr — butWarreniseasilythemosthigh- profile and most polarizing among them. The financial overhaul bill signed into law in July gives
Obama the authority to appoint a director of the new consumer bu- reau to a five-year term, subject to Senate confirmation. The agency will have the power to write and enforce rules governing credit cards,mortgages andother loans. Warrenmet about the position
lastmonthwith topObama advis- ersValerie Jarrett andDavidAxel- rod. She again fueled speculation lastweekwhen she pulled out of a law class she was scheduled to teachthis fall atHarvard. Warren had not been expected
back in the nation’s capital until later this month, when the Con- gressionalOversight Panel,which she chairs, will release its latest report on the government’s $700 billionbailout fund. A White House official con-
firmedWarren’s visit Tuesday but didnot elaborateonthe substance of the talks.
dennisb@washpost.com
MICHELLE SINGLETARY The Color of Money
Uncle Sam wants you to learn from your financial mistakes
would do uswell to look inthe mirror. Thenask yourselfwhether you
A
helped pushthis country into the recession. This exercise isn’t intended to
have you flog yourself fornot understanding the difference betweenaneed or awant, or for splurgingwhenyou shouldhave beensaving, or for going too deeply into debt onyourhome or for investing inthings you didn’t understand. No, there really isno use in
beating yourself up. Instead, use this experience to accept personal responsibility.Once youhave, you might ask,whatnext? Learnto do better. The federal governmenthopes
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tohelp by creating anational financial literacy campaign.At any other time, suchanaction could be seenas justmore busywork for our public officials. But this is a seriousmatter.What people don’t knowabout personal finance is costing themand the government a lot ofmoney. TheTreasuryDepartmenthas
beenaccepting public comment onanumber of initiatives aimed at increasing people’s knowledge of personal finance. For instance, youhave until Sunday to comment ona proposed set of five core financial concepts. Sowhat do you think people should know about earning, spending, saving, borrowing and risk-taking? The comment requests are part
of a largermissionof the FinancialLiteracy andEducation Commission,whichis chaired by Treasury SecretaryTimothy F. Geithner andmade up of the heads of almost two dozenfederal agencies. Itwas established under the Fair andAccurate CreditTransactionsAct of 2003 andwas chargedwithcoming up withanational financial educationWeb site,whichithas
atMymoney.gov. The commissioncreated a toll-
freehotline (888-MYMONEY), whichyou canuse to order a packet of informationwith various financial tips. From8 a.m. to 8 p.m. (EDT), you get a live personto take your order. However, you can’t get answers to specific questions or concerns. The commissionis also
working onpulling together a baseline of informationthatwill be disseminated by government, nonprofit and private organizations involvedwith personal-finance education. Treasurywants to knowyour thoughts onits draft plan,which you canfind at
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swe continue to assign blame for thenation’s economicmess, perhaps it
www.treasury.gov/financialeduc ation.The commentwindowfor thenational strategy closes Sept. 19.
“This is aboutmaking surewe
are leveraging all of our resources inthemost effectiveway possible tohelp familiesmakemore- informed financial decisions,” Assistant SecretaryMichaelBarr said inaninterview. Barr said the government is
putting anewspinonthe old three-legged stool concept,which inthe past described the common sources of retirement income— savings, a pensionand Social Security.To borrowthe language, the legs of the stool thatBarr describedwere thingsneeded to protect consumers inthewake of the recent financial crisis. “Peopleneed basic protections
so they arenot takenadvantage of,”Barr said. “Thereneeds to be improvement inaccess so people canget connected to financial services, and thereneeds to be improvement infinancial educationso people canempower themselves.” Without personal
responsibility, the stool can’t stand. We can’t blame the big banks
for everything thathas gone wrongwiththe economy, althoughtheyhad ahuge role in it.We can’t put all the blame on PresidentObama or the previous administration.We can’t even blame everything onaCongress that for years resisted checks and balances that couldhave prevented sucha severe recession. Some of the blame also belongs
to individualswho overspent, saved too little or borrowed too much. I teachfinancial literacy to
churchgroups, community groups,highly educated professionals, low-income workers, prisoninmates, seniors and young adults. It’s amazing howmuchpeople don’t know. Writtencomments onthe five
core competency concepts and thenational financial literacy strategy canbe sent by e-mail to
flecstrategy@do.treas.gov or by mail to theDepartment of the Treasury,Office of Financial Educationand FinancialAccess, 1500PennsylvaniaAve.NW, Washington,D.C. 20220. “Withno agreed-uponcore set
of standards forwhatAmericans should knowabout personal finance, financial educationishit ormiss across the country,” said KevinR.Keller, chief executive of theCertified FinancialPlanner Board of Standards, a Washington-basednonprofit organizationthat grants the certified financial planner certification. Ihope you take the time to
reviewwhat the commissionis working onand, as a result, improve your financial knowledge. If people don’t learn fromtheirmistakes, theywill repeat themwhenthe economy picks up.
singletarym@washpost.com
Readers canwrite toMichelle Singletary at TheWashington Post, 115015th St.NW,Washington,D.C. 20071.Comments and questions are welcome, but because of the volume ofmail, personal responses are not always possible. Please note that comments or questionsmight be used in a future column,with thewriter’s name, unless a specific request to do otherwise is indicated.
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