What Will Fix the Mortgage Mess?

[EV_Ares]

Too many proposals are impractical, or worse. Is there anything that can cushion the economy from the hit of the subprime crisis?
by Dawn Kopecki

With the credit markets in turmoil and housing prices tumbling, people from Wall Street to Main Street are wondering what can and should be done to minimize the damage to the broader economy. Should the Federal Reserve do more to bring confidence back to the markets? Should state legislatures take action to prevent a wave of local foreclosures? One of the most radical proposals came from Bill Gross, the bond guru at Allianz's (AZ) Pimco, who is calling for a federal bailout for homeowners. "Write some checks, bail 'em out, prevent a destructive housing deflation that Ben Bernanke is unable to," says Gross. "If we can bail out Chrysler, why can't we support the American homeowner?"

But forget grand gestures. The sweeping proposals being floated are better suited for grabbing headlines than for rectifying the current problems. They tend to be politically unfeasible, unwieldy, or simply foolish. Consider for a moment talk of a possible taxpayer-funded bailout for Countrywide Financial (CFC) and New Century Financial (NEWCQ)—the same subprime lenders that helped fuel the credit bubble. Then there are those who think government-sponsored mortgage buyers Fannie Mae (FNM) and Freddie Mac (FRE) can save the entire U.S. housing system from ruin. Only in Washington is it hard to understand that profit-driven, shareholder-owned corporations won't be willing buyers of clearly bad investments.

"Let the Market Cleanse Itself"
Speed and pragmatism are what's needed now. The Federal Reserve can certainly make a difference by lowering interest rates, in addition to the cut in the discount rate it's already made. State agencies are probably the best positioned to protect homeowners who have truly been the victims of predatory lending. And proposals to crack down on abusive mortgage practices and increase disclosures for borrowers are good safeguards to consider for the future.

But foreclosures—widespread foreclosures—are inevitable. The days of easy money meant that many people borrowed much more than they could afford—and keeping them in their dream houses will only penalize other taxpayers and encourage more uncontrolled borrowing in the future. Risk, as Wall Street veterans like to point out, can be risky. "It's sometimes better to let the market cleanse itself out," says Kathleen Camilli, a member of the National Association of Business Economics.

Hot Campaign Issue
The housing crisis promises to be a major presidential campaign issue in the weeks and months ahead. During the Democratic debate on Aug. 19, no candidate was short of ideas or hesitant to assign blame. Senator Joe Biden (D-Del.) said there should be more transparency among hedge funds and private equity firms, saying "they are the ones that are causing this thing to go under." Former Senator John Edwards (D-N.C.) called for a "home rescue fund" for borrowers at risk of foreclosure. Senator Christopher Dodd (D-Conn.), the Senate Banking Committee chairman, urged the Fed to cut interest rates more aggressively and asked the Bush Administration to loosen regulatory control over Fannie Mae and Freddie Mac.

Wall Street's senators, Hillary Clinton (D-N.Y.) and Charles Schumer (D-N.Y.), are among the loudest voices on Capitol Hill calling for federal aide for homeowners. Schumer said that news on Aug. 27 showing a 9% drop over 12 months in existing home sales in July was "another in a series of daily reminders that more must be done to prevent the subprime mortgage market from further damaging the housing market and broader economy." Schumer is pushing for a change in accounting rules that would allow banks to modify loan terms for at-risk borrowers without the usual penalties required under generally accepted accounting rules. He has also inserted $100 million into the Housing Dept. budget bill to fund nonprofit groups such as ACORN that provide free credit counseling and foreclosure assistance to low-income borrowers.

Clinton has made preserving the "American dream" a key component of her campaign, calling for $1 billion for state and local housing agencies to help at-risk borrowers avoid foreclosure. She's also drafting legislation to rein in mortgage brokers, requiring state licensing and federal registration.


(entire article @ link)

http://www.businessweek.com/bwdaily/dnflash/content/aug2007/db20070828_301854.htm?chan=top+news_top+news+index_top+story

[David__77]

1. I don't like Dodd's idea.

Lowering rates will only possibly delay the problem.

[TwilightGardener]

2. No bailouts for homeowners. I don't believe there's such a thing as

"predatory lending"--that's bullshit. I live in a crappy rundown old house, because that's what I could comfortably afford. I'll be damned if any sort of aid goes to people who bit off more than they could chew and need help to stay in their McMansions. I'm breaking with the Dems here--this is where my fiscal conservative side kicks in. Change your borrowing habits, people! And not everyone is "entitled" to buy a home.

[Mojorabbit]

3. I have read several articles

with examples of downright misrepresentation on the part of lenders. I remember buying my first house. I had no idea what I was doing. Luckily all went well.

[TwilightGardener]

7. I wasn't all that educated when I made my first home purchase either--

but my dad told me "Only go with a fixed rate--don't mess around with adjustables", and that was all I needed to know, I guess, aside from the estimate of monthly payments when making my purchase. Once I knew what my payments were going to be, and that they wouldn't change, I could figure out my budget. Do people not do this anymore?

[stirlingsliver]

11. I'm Not So Good At Math.

I'm not so good at math.

The mortgage company gave me a whole bunch of papers to sign.

The papers had lots of numbers and stuff in them.

I was never good at math.

So I just went ahead and signed the papers.

The mortgage company should have known that I wasn't good at math.


:sarcasm:

[TwilightGardener]

16. Well, it's those predatory lenders--they come to your apartment

and pounce on you, force you to hire a realtor and spend time looking at homes, force you to sign papers, and before you know it, you're up to your wazoo in mortgage payments--how did you get here? It's not YOUR fault!

[stirlingsliver]

22. They Gave Me A Real Nice Pen

The man from the mortgage company gave me a real nice pen.

He told me I could even keep it.

Then he put a whole lot of papers in front of me.

They had lots and lots of numbers and stuff on them.

They also had a WHOLE LOT of legal words and stuff.

I used the pen the nice man gave me to sign those papers.

I never was very good at reading -- or at math.

But I did get to keep the nice pen.

[BlooInBloo]

4. It's perfectly possible por both sides to be at fault.

[sybylla]

5. I have a hard time disagreeing with you

I know too many people who buried themselves in as much debt as they thought they could handle to have that dream house. Yet, I also know some low income and/or high risk borrowers who made deals with the devil (lenders who take advantage of their circumstances - the legitimate equivalent of loan sharks) because they had no other choice if they wanted to get out of bad neighborhoods or out from under the thumb of bad landlords.

By and large I agree, the lenders made the deals. The borrowers agreed to them. Let them sink or swim on their own.

That doesn't stop me from wanting to help some borrowers. With the new bankruptcy laws, there are some people who will never get out from underneath the consequences of a foreclosure.

[Strawman]

6. I don't know

I don't have as much sympathy for the families in McMansions who took out an arm and magically thought they'd have more money when the balloon payment kicked in, but I see alot of very modest $130-150K homes in foreclosure when I walk around my neighborhood. And Detroit is a city where there has never been alot of apartment stock especially for families with children. When housing prices were inflated, alot of people overreached and at the time they had decent paying jobs that have disappeared. All it takes is a period of unemployment or an unforseen medical expense and people are broke. Personally, I would have never been comfortable with an ARM or the $250K+ mortgage that the online calculators told me we could supposedly afford. But in an unregulated environment people start doing this stuff and it kind of becomes normal. When wages have been flat and household expenses go up, people look for ways to make ends meet and these creative mortgages were just too goddamn easy. I can understand why people turned to them.

I do believe there is such a thing as predatory lending and it needs to be regulated. And while I wouldn't go as far as saying that homeownership is an "entitlement," I think we want to pick up the mantle of FDR argue that people who work hard an play by the rules ought to be able to buy an affordable home and enjoy some reasonable measure of financial security in this country. I think we can move back in that direction without going so far as to encourage and reward wanton financial irresponsibility. I don't believe that is what happened here.

[TwilightGardener]

8. I have personal experience with this, having grown up under the

threat of foreclosure at several points when my parents weren't making enough money to swing the payments, and got state aid to help bail them out. So we had a nice house, but no food in the fridge, no money for activities, no savings. Sometimes it's better just to relinquish the house and live within your means, even if it means a shittier house, apartment, or school district for your family. Better than living on the edge of disaster all the time, IMO. I have no problem with state aid for people who fall on TEMPORARY hard times (sudden job loss, illness, etc)--I benefitted from that myself as a youngster, as I've said. But that's a far cry from folks who started off with bad credit and then went with gimmicky subprime loans to buy more house than they could afford. The lenders deserve a kick in the teeth for their greed, and the homeowners don't deserve taxpayer aid in this situation.

[Kingshakabobo]

10. There ya go - Another "lift yourself up by the bootstrapper" - that benefited from state aid.

AND the benefit of daddy looking over their shoulder to give advice when it came to the loan product you chose. I guess everyone isn't as "lucky" as you.

:eyes:

I'm in the mortgage business and I can tell you the horror stories I've seen first-hand. Most states are now licensing Loan Officers - which is a VERY good thing. At least now, there is a fighting chance at weeding out the scumbags. As it stands, a lot of scum left the business because they couldn't pass the background checks.

I've taken three applications in the last two months from 3 people that were screwed by the same loan officer with predatory loans, prepayment penalties and negative amortization loans. NONE of them knew what they were getting in to. At least one was "bumped" by 2 or 3 points at the closing table - unfortunately they had no choice but to close.

One I was able to help (that's how I was referred the other two) but the other two will probably lose their homes. We are not talking about Mc Mansions either - 150k townhomes...

Last year, I saw a Mexican immigrant couple get completely raped by a Spanish speaking Loan Officer - They were purchasing my clients home so I got to see their closing statement as part of my file - Their loan officer charged them 3 discount points, 2 origination and made a maximum yield spread of 3.5 points on the broker commission. That's 8.5% on a 150k loan.

[TwilightGardener]

15. 150K is WAY more than I spent on my first house (52,000) or my

second home (93,000). My heart BLEEDS, I tell ya! Sorry, but people who "don't know what they're getting into" don't deserve MY help, in the form of taxes, when they finally figure it out. Sell the damn home, take the loss, walk away and let it go to Sheriff's sale--this isn't life or death, like health care, this is LIFESTYLE, and does not deserve subsidy. I said I have no problem with state programs that are already in place to help folks who made good decisions but are temporarily down on their luck. But this subprime/ARM/jumbo loan bullshit is a WHOLE different ballgame.

[Kingshakabobo]

23. I'm still not clear why the sheriff's sale wasn't good enough for you and yours?

Nothing worse than a welfare queen with "republican values."

[TwilightGardener]

24. ????--I don't have republican values--unless you count personal responsibility

as a republican value. For the third time, I don't have a problem with state/local programs already in place to help folks thru a job loss or illness--my dad lost his job. He got another one. Situation resolved. I DO have a problem with a brand new national policy intended to force taxpayers into helping people hang on to a dumb investment. A house is a possession, same as a car. It won't kill people to get out from under a house they can't afford, same as it wouldn't have killed my family. Just have to suck it up sometimes. Jesus Christ.

[Deja Q]

17. Case by case scenartio, the truth is in the middle.

What are people entitled to?

And what does it take to earn said entitlement? And once you get it, how quickly is one entitled to lose it?

[TwilightGardener]

19. Americans are massively in debt--not just in crazy mortgages, but

with credit cards, car payments, etc. Some of it's necessary, some of it isn't--why do I need a nice NEW car, when I could buy a decent used, or at least a Kia, for example? I'm not holier-than-thou, I've made some dumb/greedy decisions that have had long-term impacts on my finances. I dug myself out of my own stupid holes, however--no one can, or should, expect to be rescued from their own stupidity when it comes to spending decisions. Hard lesson to learn, and I'm still learning it. I don't believe I'm "entitled" to much of anything, frankly.

[blondeatlast]

9. The problem is the wave effect if there is massive foreclosure.

Available houses are already a glut on the market and housing sales don't tell the whole story.

My entire neighborhood is full of new "sold" houses--in other words, new builds that have been sold to a division of the builder--but not to people who want to move into them. These are brand new homes that will likely be sold for less than they are worth just to recoup what is possible. Add to that plenty of built and older homes on the market and lenders arent' going to want these homes back either (but of course they share a big chunk of responsibility for this mess).

We bought new with a fixed-rate and well within our means. We qualified for even more money but we simply loved the house and neighborhood. For us, it isn't an investment and nearly all of our neighbors are just like ue--responsible, not forst time buyers, with fixed rates and well within our means. We ought to feel safe, but if property values plummet, all hell breaks loose. What if we need to relocate? This is hardly a local problem abd we may not recoup the money we RESPONSIBLY paid.

Truth is, I sense a bit of resentment from many who could have bought as we did, with big down payments, fixed-rates, and not looking for investment property when I read these threads. Those of us who did are going to be hurting from this mess--and I want to see some help for borrowers. The lenders should have seen this coming and moved BEFORE the crisis. Now we are all going to be hurt bug time.

[Javaman]

12. Freezing interest rates at their current level and don't allow the to reset?

:shrug:

[flvegan]

13. Change the foreclosure process to be more like a bankruptcy

Most defendants can't pay their mortgage, so they sure as hell can't afford a lawyer. The court should appoint a trustee to work between the lender and the court in the interest of mediation and formulating a workout. That workout could be a loan modification, reduction in interest, suspension of payments, etc. Keep the loan performing. It's in the best interest of the borrower, the lender and the community. Bet you'd see a 75% reduction in loan acceleration, as lenders would be more likely to seek loss mitigation over court, as well as a 75% reduction in families losing their homes and REOs.

[Wcross]

14. The market will work itself out.

I agree there should be new laws regulating the mortgage lenders. It is too late to undo what has been done in the past.
As for bailing out people who couldn't afford the home they bought, there is already a way to do that. The lender will foreclose on the property if the buyer can not sell it.
If we bail out homeowners who made financial mistakes are we going to bail out investors who lose money when the stock market tanks? Can I go out and get a mortgage NOW for more than I can afford to take advantage of the bailout? Why don't I get anything for buying less home than I could afford? Where is my money?

[dipsydoodle]

18. The honest answer to your question

is about five years or so - in other words time.

We went through exactly the same thing here in the UK back across 1989/1990. The reason then in our case was totally different but that's roughly how long it took for the housing market to settle down again.

[Matariki]

20. The solution seems obvious and simple to me

Adjustable rate mortgages that are forcing people into foreclosure when the rates go up are simply returned to a reasonable fixed rate.

[librechik]

21. as soon as the monsters can evict us and buy all our property for pennies

and make sure we are too weak to protest, then it will be fixed. Just like the Savings and Loan scandal in the 80s. They did this on purpose, you know. It's just one more "wealth re-distribution" scheme of the Financio-Republican Brain Trust.

[Johonny]

25. all I know is any federal bail out of current homeowners

better also include some heavy benefits to us future home owners that thought buying into an artificially inflated market at a record low lending rate with record low oversight of who was getting the money was not a sound financial discussion. You know the people in society that are fiscally responsible. We're sick of paying money out to clean up for other peoples mistakes.

[Johonny]

26. all I know is any federal bail out of current homeowners

better also include some heavy benefits to us future home owners that thought buying into an artificially inflated market at a record low lending rate with record low oversight of who was getting the money was not a sound financial discussion. You know the people in society that are fiscally responsible. We're sick of paying money out to clean up for other peoples mistakes.