The problem with the housing market has certainly reached a crescendo in recent months and has gained the attention of the Bush administration recently. The current suggestion is to put a five-year rate freeze on sub-prime mortgages that are currently being paid on time at introductory rates, but are scheduled to reset in the near future. See the article here: http://biz.yahoo.com/ap/071205/mortgage_crisis.html.
How does this help Homeowners?
This can be beneficial to everyone due to the widespread effect that foreclosures and short sales are having on homeownership and our economy at large. While Tucson has not been as hard hit as places such as Michigan or California, there are certain areas of town that are experiencing a severe downturn in prices due to the glut of homes priced "under-market". A plan such as the one proposed by the Bush administration would help prevent many of those homes from going on the market and would help many families maintain stability by retaining their homes and hopefully being given the chance to build some equity before either selling or refinancing in the future. It would also help other homeowners who do not have subprime loans to maintain their homes' values, rather than seeing them fall due to factors completely out of their control.
Is this just putting a Band-Aid on a Serious Wound?
Perhaps. We still have the issue that sub-prime mortgages were made and are still being made in many cases. However, this seems to be a better approach than just "forgiving" homeowners' debts when they sell through a short sale. In this circumstance, the banks are basically being forced into making a wise business decision. Even at the lower "introductory" rates, they are making money as opposed to losing money on a short sale or increasing their real estate owned (REO) inventory in addition to losing money by foreclosing. And in five years, they may get those higher rates or at least get the opportunity to keep the homeowner's business by refinancing their mortgage to a fixed rate loan.
For the homeowner, this would be a good break. After gambling that prices would rise in a couple of years and they could sell, or perhaps that their income(s) would increase, homeowners are increasingly in a position where they simply can't afford the rate increase. I recently represented a buyer on a short sale where the seller quit paying the mortgage because her payment went up by $700 per month. I don't know many people who own a $200,000 home who can afford that increase for long. Perhaps if people are given the chance to remain in their homes they will become more financially stable and will be able to afford a conventional (or at least an FHA or VA) loan the next time around.
I would hope that this "close call" would teach many of those owners (and some bystanders) a lesson and we would all be cautious about the financial commitments that we make in the future. That may be wishful thinking, though. Only time will tell.
How would this Affect the greater Economy?
Foreclosures and short sales are a great opportunity for buyers, particularly investors. However, they do not represent the majority of the American public. When the housing market destabilizes, many many homeowners lose money because prices drop and they are no longer able to access the "equity" that they once had in their homes. This is a liveable situation only if the homeowners aren't moving. If they are forced to move, they either have to take much less and perhaps not make any money or be required to bring money to the table OR they could be forced into a short sale situation themselves. Renting a property out is an option, but with many homeowners choosing this option, there are more and more rentals on the market, which causes rental prices to drop. Rental prices rarely cover the full mortgage, so the owner is still left paying something every month.
When people are losing money, they aren't spending and other industries begin to suffer. When that happens, people lose jobs and the downward spiral begins. I would like to see that prevented if at all possible. Even if this rate freeze goes into affect, there will still be many foreclosures and short sales on the market, providing good deals to some buyers. If we can stop the bleeding, though, our nation as a whole will be stonger economically.
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Robin-It seems that President Bush is being very proactive to save our banking industry and our families homesteads here in the United States. Between The Hope Now Initiative and House Bill 3648 it's a start to avert disaster.
You are preaching to the choir here - although I was surprised at the LENGTH of time that the freeze is supposed to last. 5 years is a long time. I was expecting 1-2 years to give people time to take a breath and decide what to do.
In a totally fair and decent world, we would ONLY help those who deserved it - and give them as much help as they needed - but that's not what will happen - unfortunately.
Mark - this is not going to "avert disaster" This is going to become another factor that caused a disaster. When we put a freeze on these rates - the investors that bought these loans are going to be upset due to the fact that when they bought these loans - they were told the interest would increase in X years and when they don't - they are going to give these loans back to the originator - which in turn prevents them from being able to lend any more money. So they will have to increase interest rates so that they can sell other loans - and I'm sure you can see what is going to happen next. So lets not start praising Bush quite yet.
Let's not forget about all the other homeowners out there who were more cautious and wisely chose the more expensive fixed rate. By extension, these people are being penalized for not gambling. Prices of everything are up for everyone. The fixed rate borrower made a better decision. Oooops.
Whatever happened to decision = consequences? Sometimes good. Sometimes bad.
I have not yet heard a story of some loan officer sticking a gun to a borrowers head and forcing them to sign papers on a loan that they eventually might not be able to afford.
I am with Vincent in the assessment. I think anything the government will do for the long term will just delay some of the inevitable, just like the feds making money cheap in the early 00's to stimulate the economy. Oh we got a stimulated economy alright. Now we have sellers who bought pre 2004 (when the home prices escalated) who are upside down because they couldn't resist using their home as an ATM, we have "investors" (word used loosely) who got blindsided by greed and snatching up property in hopes of quick appreciation and a flip. Lots of people also made conscious choices to go for the ARM over a fixed because they would save an extra whatever per month on interest rates that were already historically low.
To the people who really got into a bind because they were deceived and unable to make a conscious & reasonable choice about real estate, I don't know, I would say that there would be a sense of "normalcy" within our foreclosure statistics if these were the people that our hearts bled for.
The ramifications of some of these proposals could further stall real estate in this country as Vincent mentioned by further credit tightening!
The homeowner has to take some personal responsibility for the situation they are in.
Hey, Tucson Girl! Congratulations on the feature, Robin! The star is sort of small up there at the top, so I found another to fit the bill! This is well written; thank you!
Mike in Tucson
Well, the discussion on Matt's post is quite different and poses some good questions and concerns that would contradict your thoughts. I will be interested to see what results from all of this!
Hope Now....
Let people you know who may be going through this about the program. Below is the link to the post I made earlier today. The information is also included so that it's easy to spread around...Please anyone who reads this make sure to get the information out to as many of those who are in this situation. Since so many people want to hold us to the fire...let's join together to turn the tide and HELP people. Whether or not you gain $ from it or not.
The old phrase about "Doing unto others as you'd want done unto you" comes to mind...It's basic human nature to want to lend a hand to others in need...so Step Up Active Rain. Please!
Together we Can Make a Difference~and on that note I'm getting off the soap box.
Paige Rausch
http://activerain.com/blogsview/297761/Hope-Now-Alliance-Hotline
Hope Now Alliance Hotline
1.8
88.995.HOPE
HOPE Homeowner’s Hotline-The hotline is an existing national network that will receive, assess, counsel, refer, and connect borrowers to their mortgage servicers, fulfilling another deliverable in the Alliance’s action plan.
The HOPE Homeowner’s hotline (1.888.995.HOPE), managed by the Homeownership Preservation Foundation, is the cornerstone of a foreclosure prevention effort supported by many of the country’s largest mortgage companies.
The HOPE hotline provides free, independent, bilingual, HUD-approved counseling and advice 24 hours a day.
Help begins as soon as the homeowner calls. The earlier a borrower seeks assistance, the more options are available to ensure the borrower can keep his home. Foreclosures hurt everyone – the borrower, the neighborhood, the lender, and the investor. Lenders want borrowers to be successful. The goal is to keep people in their homes and, when that is not possible, prevent foreclosure.
“HOPE NOW partnered with NeighborWorks America and the Homeownership Preservation Foundation in this program that improves lives by counseling consumers on their financial situation and working with them to help them succeed as homeowners.
The mission for HOPE NOW is to maximize the preservation of homeownership while preventing foreclosure by assisting borrowers who have the willingness and wherewithal to remain in their homes, but need some help to do so.
HOPE NOW is an alliance between counselors, mortgage market participants, and mortgage servicers to create a unified, coordinated plan to reach and help as many homeowners as possible.
The members of this alliance recognize that by working together, they will be more effective than by working independently. The Department of the Treasury and the Department of Housing and Urban Development encouraged these leaders to form this alliance, which includes, AIG/American General Financial Services, Inc., American Bankers Association, American Financial Services Association, American Securitization Forum, America’s Community Bankers, Assurant, Inc., Aurora Loan Services – A Lehman Brothers Company, Bank of America, Carrington Mortgage Services,
CCCS Atlanta, Inc., Citigroup Inc., Consumer Bankers Association, Consumer Mortgage Coalition, Countrywide Financial Corporation, EMC Mortgage, Inc., Fannie Mae, The Financial Services Roundtable, First Horizon National Corporation, First Tennessee Home Loans, Freddie Mac, GMAC ResCap,Homeownership Preservation Foundation, Housing Partnership Network, The Housing Policy Council, HSBC Finance, IndyMac Bank, JPMorgan Chase & Co, Litton Loan Servicing, Merrill Lynch-Home Loan/Wilshire, Morgan Stanley Home Loans/Saxon, National City, NeighborWorks America, Mortgage Bankers Association, Ocwen Loan Servicing, Option One Mortgage Corporation, PMI Mortgage Insurance Co., Securities Industry and Financial Markets Association,
State Farm Insurance Companies, SunTrust Mortgage, Inc., Washington Mutual, Inc., Wells Fargo & Company. More companies and organizations are expected to join in the coming months.
I too wrestle with the fact that this is helping people avert the consequences of their actions. Also, it negatively affects others by causing mortgage companies to tighten their rates. However, if "something" isn't done, it will negatively affect every homeowner in the country by way of the fact that prices may continue to plummet. So what we need is to find the course of action that will help the most people while also causing injury to the fewest innocent bystanders. Definitely not an easy line to walk. I would like to hear more of your opinions, thoughts and suggestions.
we need to help homesteaders...the investors are on their own! I think this is a very good post!
When more details are released, I am curious about how the public and the pundits will react. Will people do what's necessary to take advantage of their reprieve? I've heard that many are clueless about their mortgage and don't know it's about to reset to the tune of $700 a month.
I really like the proactive position that the government is taking to help out with the crisis. Let us not forget that they do share in the responsibility of the problem as well through.
As far as the House bill 3648 is concerned- I think that the measure is going too far. The idea behind the bill is good- combat mortgage fraud. But the reality is that mortgage fraud likely represents less than 1% of the mortgage industry- and I am in one of the hotbeds for mortgage fraud in the U.S. (the Kansas City Metro Area is consistantly in the top 3 places that see a lot of mortgage fraud).
That house bill radically changes the mortgage industry and will decrease th number of mortgage brokers in the U.S. I just don't believe that consumer benefit with competition is decreased. In addition, the elimination of the yeild spread I fear will increase origination points and closing costs. In a time where we have see the elimination of closing costs assistance programs and 100% financing programs- all good things mind you- we don't need to tack on 1 or 2% more in loan orginination points. This will hurt the good consumers that don't have a lot of money to put down. I was one of those buyers 10 years ago. I have never been late on a payment and have gotten a lot of equity in my home since then. But fresh out of college, we didn't have a lot of money to purchase a home!
I like some of the changes that are beening made, but we do need to be careful not to swing too far in the other direction. It seems like here in the U.S. we don't like common sense, we like to swing between extremes!
Another article was written regarding how this whole thing will affect the purchase of mortgage securities. I agree with that writer that it is a big push by politicians to make it look like they are actually doing something, when the bill they are trying to push through will ultimately be a total disaster in itself with much more far reaching consequences. It will be interesting to see how all this plays out.
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Great post, gives alot of insight into the situation. Thanks for the link to Hope Now - I will do my part to information people about this source.
I don't think we should bail out anyone, but if we do start bailing out owner occupants, we should reconcile their original loan apps with their current financial status and if it is determined that they committed fraud (income/expenses/assets) in their original loan apps, proscecute them to the fullest extent of the law and make sure the IRS is aware of any stated income discrepancies.
I see some big issues with the plan as outlined. How about the folks who have 5/1 ARMS that are coming due next year? According to this plan, there will be no help for them because they got their mortgage pre 2005.
I'm going to have to sit down and write a post.
But, the basis is that this plan is deserving of far less than praise. It isn't sound business, and as usual, when the government steps in to help, there will be consequences that aren't taken into consideration. Several commentors hit upon these points.
The basic point is that this is not going to avert the disaster. It will be the beginning of a new disaster.
It will continue to be interesting to watch this and see how it all transpires.
Thanks Rich for your post....
Let's not forget about all the other homeowners out there who were more cautious and wisely chose the more expensive fixed rate. By extension, these people are being penalized for not gambling. Prices of everything are up for everyone. The fixed rate borrower made a better decision. Oooops.
this is where I am and usually we get ARM's but last year we refinanced to pay off credit cards charging 18% and up. Course Realtors are self employed and have to go different routes to qualify so this time of all times we took the higher rate and went FIXED. We have a stiff pre-payment penalty so no refinancing for another year. In this industry a year is a long time and five years is eternity. So when I go to refinance next year the rate will be higher than today's rate and the qualifications will be stiffer. Hopefully, I will have a great year and be able to buy down my loan. That is my goal.
Also, I have worked with a few clients over the last three months that did not qualify for loans that would have prior to the end of the subprimes. Not that they would have gotten ARMs but the qualifications are stricter now and I lost them.
You make some good points in this post. However I do not agree with you on many of them. For instance only 14% of the infamous Sub-Prime ARM's on the market have actually adjusted and the majority of foreclosures are investors and people who cannot afford their current rate. A very small percentage of those 14% of ARM's are in foreclosure or have even received a notice of default. A good many people refinanced out of the ARM as soon as their PPP expired or as soon as the rate adjustment took place. Freezing the rate is not going to do anything for people who cannot afford the rate that is being frozen. As far as the rate freeze for people who are making their payments on time ...Well if they are making their payments on time their credit has probably improved since taking the ARM and they would probably qualify for conventional financing at a lower rate than the rate that the Bush adminstration is proposing to freeze. The real fact of the matter is that foreclosures and ARM's are much less loosely connected than Bush is suggesting ..... Kind of like Iraq and 911.
Christopher - Thanks for your comment. I think perhaps you misunderstood the purpose of the rate freeze. The point is that if you freeze the rate at a payment they can afford then they won't default once the rate adjusts upward (because the rate won't adjust). Some people have indeed been able to refinance, so I believe that this measure is meant to target those whose credit may not be well enough to refinance at this point and who can't afford the adjusted payment.
Bob - You may be right about the government reimbursing "lost" revenues. If something like that happens then government is still sticking it to the little guy and this whole plan may cause more problems than it solves. It will be interesting to see how this progresses over time.
Robin - I think you missed the point.
If you bought a pension plan, and it was promised to pay out on a specific schedule, or you would be able to seize the assets that backed it, and then it didn't pay out on that plan... and the government came in and told you that you were just going to have to deal with it, you would be upset... and with good reason.
Some of the buyers of these mortgage backed securities are pension funds, retirement accounts, and educational trust funds. These are some of the 70+% of US households that are invested in the stock market. So, instead of the people that made irresponsible decisions being held accountable for those (that would be both the banks and the consumers), that cost will be shifted to people that had no part in the original transaction.
We know that some of the loans that were packaged and sold were done so fraudulently... but they are a minority. But, in those cases where people bought fraudulent packages, let the lawsuits fly. Now, instead, we are going to see lawsuits fly everywhere... All of us will pay, and the lawyers will make out once again.
Lane - What "point" did I miss here? I agree with you that I would be upset if my pension did not pay out as scheduled. However, I would also be very upset if I couldn't sell my home because several of my neighbors didn't choose wisely financially and were foreclosed upon. Reality is that the poor decisions of some folks are going to affect all of us either in the real estate market or the stock market or even in the economy at large.
So what do you think would be a better plan to help minimize the damage to the innocent? Some on here have suggested just letting these people take the consequences of their actions and do nothing to mitigate those damages. As a parent, I'm inclined to agree. However, doing that will have a devastating affect on the real estate market and will affect the biggest investments most people own, their homes. While I don't believe that the Bush plan will be all positive and rosy, I'm not sure I have a better alternative.
Bad, bad, BAD! Government needs to let the market sort itself out. And on the details of the "deal" - it's a joke. If you called your lender and you were current they actually told you to get two months behind. NOW we find out that if you missed a payment EVER you will not qualify for the deal. Shameful!
I think this is the most bizzare thing I have ever seen, You must be current on your mortage, but have a credit score of under 660? So - I have to have been good - and bad? If I made my house payment but blew off my car payment I get help?
I think this program will go down in history as the biggest waste of time and money in a long time. Just one guys opinion though.
Thank you all for your comments. Now that the details are out on this plan, it doesn't look as rosy as they promised (typical scenario, right?). I posted another blog entitled: More Thoughts on the Bush Administration's Rate Freeze Plan. I would enjoy continuing our discussion over there.
If you own a home, and the neighbor decides that they want to paint their home green with pink polka-dots, and host put "[pick an idiot] for Congress" signs on every square inch of their property (assuming you live where it is legal), that would also drag down the value of your property.
Should you not also be entitled to a government bail-out?
But, when it comes down to it, only about 1% of the households in the country are affected. Of those, only about 1/3 will be able to qualify. So, if your subdivision has 300 homes, you will have 2 come on the market from foreclosure instead of three...
And for this, the government is crossing a very serious line.
please tell me what gives the government the right to do this? Where is it in the Constitution? Isn't that the framework for the laws of this country? While you are there looking, please read the 10th Amendment...
I NEED TO KNOW WHAT I CAN DO ABOUT BEING IN THIS CRISIS. I BEING LIVING IN MY HOME FOR FOR TWO YEARS AND WASHINGTON MUTUAL HAVE BEEN WRITTING ME ABOUT REFINANCING MY HOME. AS MUCH TO SAY I WERE SUPPOSED TO BE ON A FIXED RATE FROM THE BEGINNING. SO i STARTED THE PRECEDURE OF TRYING TO GET MY HOME REFINANCED THIS IS WHEN I FOUND OUT THAT I WAS ON AN ADJUSTABLE RATE. I HAVE TO PAY PROPERTY TAX, HOME INSURANCE , AND A HIGH INTEREST ON A DOUBLE MORTGAGE. I AM PRAYING THAT THEY WOULD GO BACK AND REFINANCE ALL THOSE LOANS ON TO A LOW FIXED RATE. I HAVEN'T FALLEN INTO FORECLOSURE AND I PRAY THAT I DON'T. BACK TO MY HOME, I DECIDED TO GO BACK THROUGH WASHINGTON MUTUAL TO GET A FIXED RATE AND WELL THEY RAN MY CREDIT AND THEY SAID THAT I HAVE TO HAVE A BEAKING SCORE OF 580. WELL TO SAY MY SCORE WAS 577, THEY TOLD ME THAT THEY CAN'T HELP ME. I THINK THAT THAT'S A LOT OF MESS. I NEVER MISSED A PAYMENT AND I PAY GOOD WITH THEM NOW. TOP ME IT SEEMS LIKE THEY WANT ME TO FALL BECAUSE THEY WON'T HELP ME . TIME IS HARD AND IT'S GETTING HARDER. MY HOME NEED TO BE SECURED WHERE I CAN CONTINUE TO PAY MY MORTGAGE. WHO CAN HELP ME? INEED HELP!!!!! PLEASE RESPOND QUICKLY. THANK YOU I LIVE IN LITTLE MOULTRIE, GEORGIA.
Kimberly,
I am so sorry to hear about your difficulties. It sounds like the bank has really been promising you something and then not delivering. I am going to refer you to a great loan officer in Atlanta, Georgia. He may be able to refinance for you or, if you owe more than the house is worth, he may be able to do a short refinance. His name is Jonathan Blackwell and you can call him at 404-551-3845 or visit his website, http://www.203kloan.net/.