Finance Globe

U.S. financial and economic topics from several finance writers.
7 minutes reading time (1369 words)

The Subprime Mortgage Bailout

There's been a lot of heated discussion about the mortgage bailout. And why shouldn't the discussion be heated? Predatory lenders and gullible borrowers got together, and somehow the borrowers became convinced that they could afford a house they didn't have the income to pay for. Thinking the boom in real estate would never end and that housing prices would continue to climb, they gambled on the biggest purchase of their lifetime. Rather than play on the safe side, borrowers betted that they could pay their low payment for a couple of years and then refinance their adjustable rate mortgage before the payments got the best of them. That trick didn't work, and now we have record numbers of mortgages in default, homes in foreclosure, and countless others who have no idea how they will manage their increasing house payment.

Well, in an attempt to prevent further deterioration of the real estate market and more damage to our economy, our government has assembled a private sector group, known as the Hope Now alliance, to help struggling homeowners by "freezing" ARMs at their current level for the next five years. This is only for homeowners whose adjustable rate mortgages were originated from January 1, 2005 to July 31, 2007, and whose mortgage rates are due to reset between January 1, 2008 and July 31, 2010. A homeowner needs to be able to afford to keep up with payments at the frozen rate; they won't qualify for the freeze if they've already missed payments. And actually, the homeowner has to barely afford to keep up with the payments; someone who is well off enough to afford an ARM increase won't qualify for the freeze.

Other options for home owners include refinancing with a private mortgage lender for a low fixed rate, and expanding the FHA's ability to work with people who have good credit but cannot afford the ARM increase. These measures are intended to help many families stay in their homes, and to help prevent deterioration of neighborhoods with rising foreclosures. A neighborhood full of boarded-up foreclosed homes is bad for everybody, whether they're buying or renting, and whether they can afford their home or not. But let's at least make sure that everybody who tried doing it the easy way learns from this lesson, and that history never repeats itself. And last of all, let's be sympathetic to the wise home buyer who thought they were acting responsibly when they bought a house they could pay for, or to the renter who put off buying until they knew they could handle it.

My personal example, I bought a house during that timeframe, and I could have taken an adjustable rate mortgage that would have started off at a lower payment. But, I chose a thirty year fixed-rate mortgage instead. Do you want to know why? Because I wanted the security of knowing that the payments would be always be what I could afford. Well, what an idea, buy a house I knew I could afford. I would have been better off taking an ARM, buying a bigger house, and paying lower payments for the last two years. Then, when the payments started taking a bigger chunk of my income, I could just wait for someone to say, "Oh, the contract you signed doesn't matter, you can keep your lower rate." Boy, do I feel ripped off...

And what about the homeowner who bought a house with an ARM during that same period, but chose to purchase within their price range? They wisely considered the higher payment that was inevitable down the road. They probably could have been approved for a bigger mortgage than they took on, but refused to take a mortgage that could pose problems for them later. They are being severely punished by this bailout, while those that made bad choices are being rewarded. Why should their rates go up just because they can afford it? They could have foolishly taken on a bigger mortgage, bought a better house, and eventually face not being able to afford their house. Now, their rates are going up, and irresponsible borrowers' rates are being frozen. What this means is, that dollar for dollar, those that made irresponsible choices are getting a better house for the same payment that the responsible home buyer is paying.

How about those that have been dreaming of becoming a homeowner, but have put it off until they know they can afford it? They may have browsed the real estate market and checked with mortgage lenders. Maybe they even considered an ARM and then realized that the payments would soon increase beyond their budget. They may have thought, "Wow, the contract says that the payments can go up by such and such amount over a several year period, and I'm not sure I can afford that kind of increase. Maybe I should wait a few years until I can really afford a home." They are probably sitting in their apartment, fuming, and wishing they went ahead and bought a barely affordable house.

Then you have all the home buyers of the past, pre-2005, who later realized they couldn't afford their ARM. Those families also suffered through losing their home due to job loss, unexpected medial bills, or even just plain, old, bad choices. They didn't get bailed out. They did what every one else has had to do when they buy more house than they can pay for, either sell it or lose it to foreclosure. But those were just a few scattered families here and there. It wasn't like there was an epidemic of defaulting mortgages that could domino into affecting the financial markets of countries across the globe. And, now the real estate market is so bad that selling is difficult, and selling without taking a loss is nearly impossible for anyone who purchased their house just recently.

So now that we have so many bad mortgages at risk for default, we are looking at a mortgage bailout for damage control. What's that going to do? The government's high hopes are that it "will bring stability to a shaken economy." It may be too little and too late for that, and anyone who has made poor financial choices in the past has had to live with their mistakes, learn from them, and recover from them all on their own, without help from the government.

There are still plenty of people who bought a home recently, who now owe more than their house is worth due to the decline in home values, but are still paying their mortgage on time every month. These responsible borrowers make good on their promise to pay and respect the written contract involved in purchasing a home. It sends a really bad message to those who take responsibility for their commitments, when our government has to resort to saving those who don't fully think out their actions before they agree to the biggest purchase of their lifetime.

From the beginning, we blame the greed of the lenders and borrowers that started this mess. Yeah, lending standards became pretty lax, and now people who were poor credit risks to begin with are at risk of defaulting on mortgages. What a surprise. But, now our economy has taken a severe hit due to the irresponsible behavior of both lenders and borrowers, that has forced the decline of home values.

No matter how much it bothers some of us that our government has resorted to bailing out those that can't afford the payments they agreed to, it may be a necessary action. The mortgage bailout may help prevent a good number of foreclosures, slow the downward spiral of the real estate market, and strenthen our economy. At least, we hope. We won't know for years if it will really help, or just drag out the process. Whatever happens, it's time for people to stop looking at their house as an investment, and start looking at it as their home-sweet-home. It's not like most of us have a choice; selling now or in the near future will be difficult, and we will just have to learn to love the place we call home.


Debt Settlement
The Economic Stimulus Package


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Thursday, 25 April 2024

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