No Bailout for Stressed Mortgage Holders
Government will provide some aid, but not enough to save millions of families from losing their homes.
By Matthew Mogul, Associate Editor, The Kiplinger Letter
September 26, 2007
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Expect only limited help from the government as the subprime mortgage mess continues to take a heavy toll. Foreclosures are approaching record levels, and we expect more than 2 million families to lose their homes over the course of this year and the next as interest rates on adjustable rate mortgages reset higher and push the monthly payments out of reach.
That's not to say regulators and government agencies won't try. Though no big bailouts are on the way -- for either homeowners or lenders holding troubled mortgage loans -- government officials in Washington and at the state and local levels are pushing initiatives that will help stanch some of the bleeding.
"I haven't seen one broad program that would put an end to this," says Rick Sharga, vice president of marketing for RealtyTrac, a California-based group that tracks foreclosures. "What is heartening is there are a number of small programs that will help some people keep their homes. I think you're going to see these small scale activities that will have an impact."
State governments are doing the most, especially those that have been hit hardest. About 70% of all foreclosures are concentrated in seven states: Arizona, California, Florida, Georgia, Michigan, Ohio and Texas. In some locations, the troubles are tied to plant closures and layoffs, while in others, the culprit is speculative buying.
Aid is taking several forms: Many states are setting up hotlines that offer advice and even help homeowners bargain with lenders or assist with refinancing. Ohio has gone so far as to sell $500 million in bonds to establish a fund to help low-income homeowners refinance their mortgages, while state programs elsewhere offer loans to cover refinancing fees. Massachusetts will postpone foreclosures for up to 90 days to buy time for homeowners to try to work out problems.
Federal regulators and policymakers are also jumping in. The recent Federal Reserve move to cut interest rates is an example of this. The lower rates will help some homeowners with adjustable loans by limiting the hike in monthly payments they face.
Federal regulators also gave mortgage giants Fannie Mae and Freddie Mac permission to expand their investment portfolios by 2%. That frees them up to hold more mortgages, making it easier for banks and other home loan originators to resell their mortgages on the secondary market. Fannie and Freddie want more, insisting they need a 10% portfolio increase to help stressed homeowners, but that seems unlikely for now.
New banking guidelines issued by Washington should also help a little. They urge lenders to be more flexible and more proactive in spotting trouble early. In some instances they'll recommend that homeowners seek nonprofit debt counseling, while in more dire cases lenders are encouraged to waive penalties or reduce prepayment fees that block refinancing.
Congress, meanwhile, is moving to thwart future problems. Legislation to modernize the Federal Housing Administration, cutting red tape and letting the agency handle more refinancings, will pass this year. The law will increase the size of mortgages the FHA can insure from $362,000 to $417,000. It'll also lower down payments from 3% to 1.5% -- and in some cases to zero.
A crackdown on predatory lending is also assured, with new regulations and legislation to increase disclosures and tighten subprime requirements. Expect extra legal protections for more subprime borrowers. There will also be bans on mortgages to consumers who don't earn enough money to make monthly payments after low teaser rates have expired, as well as limits on prepayment penalties and low-documentation mortgages.
What should beleaguered homeowners do? Seek assistance early. Most loan officers will try to work something out to avoid foreclosure. It's in their best interests to do so: A foreclosure will cost anywhere from 20% to 40% of the value of the mortgage, meaning it's better for the lender to offer a struggling homeowner a loan modification. Lenders and mortgage servicers -- those handling payments -- have leeway even if loans were bundled up and sold off to big investors.
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Reader Comments (21)
Posted by: James M at 09/26/2007 03:45:12 PM
"A foreclosure will cost anywhere from 20% to 40% of the value of the mortgage" That statement should tell everyone something about just how speculative and overvalued the housing market actually is. Not to mention how much pain everyone will eventually feel once the mess is cleared.
Posted by: idiotproof at 09/26/2007 11:59:35 PM
Although I feel for those who will lose their homes, I am against any kind of government aid to bail them out. Buying a home is not for everyone, especially if you don't have the sense to do a little research. If you went with an adjustable rate mortgage and you weren't aware that your house payment would rise, that's on you.
Posted by: amanda at 09/27/2007 01:26:51 AM
If only the government had cracked down on predatory lending before now. The greediness of lenders is coming back to bite them. At least measures are being taken to help people keep their homes. How long with the downward spiral last?
Posted by: Moe at 09/27/2007 08:43:35 AM
These are the same borrowers that QUALIFIED for a REAL MORTGAGE using REAL UNDERWRITING GUIDELINES for the lenders to DETERMINE if the borrower that is APPLYING for the REAL LOAN can AFFORD that there MORTGAGE that they are APPLYING for at the BANK using UNDERWRITERS that are EMPLOYED by the LENDER to MAKE SURE that there BORROWER can PAY THEM BACK once they LEND THEM THE CASH. You see, every loan that is originated has to be sold to the consumer before it becomes and origination. Many loans that were sold over the last few years, as you know, were adjustable rate mortgages. Consumers never say, "Please put me in an ARM that adjusts in 2 years." No, they were "SOLD" these loans. Here was the typical sales pitch by licensed professionals. " I know that you didn't want an adjustable rate mortgage but that all you qualify for. But don't worry Mr. Jones, I'll be able to refi you in 2 years and get you into a fixed loan, no problem. This is just a band aid loan because you have tarnished credit, can't prove income and you don't have a dime to your name." Do you think these same homeowners would have been sold the loan if it went like this? " Here's your loan Mr. Jones. It's and adjustable rate mortgage that will shoot through the roof in two years, your payment will double, you'll be screwed financially, the bank will eventually foreclosure on you, ruining your credit for 7 years and your life will leave you because she's sick of you drinking cheap scotch on their dirty linoleum floor." I guarantee that if that was the case then we wouldn't be where we are at now. But what can we do? We can't turn back time and we must look forward to solutions. What we have here and I am sure you know is the result of bad lending practices and over speculation by real estate investors. Probably 75% of the mortgages made here over the last 2 years are 2/28's and 100% loans. A lethal combination as we know. The facts are that there are no mortgage products left with any creativity out there. There is nothing but plain vanilla loans available for homeowners that are living in a Ben and Jerry's New York Super Fudge Chunk society. These Fannie Mae and FHA programs are the same loans that were created many moons ago for a plain vanilla society. The government needs to take the the bull by the horns and get it the hell out of the china shop. A massive loan modification campaign is the only way. Moe www.LoanSafe.org Protecting America's Homeowners
Posted by: Ed at 09/27/2007 08:58:41 AM
Why don't they just extend the loans to 40 or 50 years reduce the payments and make the loans fixed? Wouldn't that solve alot. People can always refinance later, invest instead of spend on foolish things then get into a better situation later.
Posted by: jack at 09/27/2007 12:50:01 PM
The problem started, as Greenspan acknowledges, with the Fed failing to rein in low interest rates. It grew when the rating agencies, S&P, Moody's etc. rated bonds AAA when they had up to 50% subprime, high default loans. It mushroomed when mortgage bankers, who are unregulated, were able to offer nothing down, no income verification, ARMS with teaser rates as low as 2%. When the rates go up to market, the people can't make the payments. Add in a ton of greedy speculators trying to flip houses, and you have a problem, of global proportions. As far as bailing out speculators, greedy lenders and hedge funds who made bad investments in toxic bond packages - no way!
Posted by: pg at 09/28/2007 10:29:45 AM
Let's see...You say "No bailouts" in the heading and then spend the rest of the article describing the bailouts planned...You say "stressed mortgage holders" without going into the possibility that it is only the ones who tried to buy a house that was way beyond their means and they caused their own stress. At least possibly? I think that the title on the article should read. "Politicians are abusing taxpayer $$ as we speak thinking about stealing billions of $$ from citizens who live within their means, in a monumental immoral abuse of power to give to irresponsible people who feel "entitled" to own a more expensive home than you, regardless of affordability, so they can buy votes with your taxpayer $$ for the next election". And why are we not seeing laws proposed by the politicians, that anyone who flipped a house within the last 5 yrs and made a profit, we want some of those profits back...They would not think of doing such a thing would they?...This talk is all about privatizing the profits and socializing the losses and it must be stopped!!We have an 8+ trillion $$ (and growing by the day) debt that we are passing along to our children, social security is extremely underfunded and same goes for medicare...And these people have the audacity to propose such garbage and force others who actually didn't spend like a drunken sailor for it!!!This is rubbish and everyone should go to www.senate.gov and www.house.gov and tell their representatives about it...Thanks
Posted by: Denise at 09/29/2007 08:16:55 PM
I consider myself 'ultra-conservative' so if I hadn't been caught in the foreclosure mess I'd be as cynical and self righteous as you right now. Like many, my foreclosure did not happen out of greed or living above my means at the time. I saved over $25,000 as downpayment and purchased what was, at the time an affordable home. The first few years I paid, property taxes, hoa fees and homeowners insurance in cash. Then 9/11 happened, my business slowed and I got sick. I couldn't make the separate escrow payments so I refinanced for an ARM loan. In two years I went to refinance and they insisted I have an even better credit score than before. My loan went from 1500 to 3600. I lost everything and am now in no position to work as many hours as before. I'm sure some people's eyes were bigger than there paychecks but there are lots of folks like me as well. So before you pass judgement remember, but for the grace of God go us all! Denise Houston, Texas
Posted by: pg at 10/04/2007 12:33:28 PM
You know Denise, my family rented my whole life because they could not afford a house. And when I was 6, my home burnt down. And so we stayed with my grandparents for 6 months while my parents found a new apartment to live in. So I know what it is like to be displaced from your home and I still have bad memories about that. My girlfriend and I rented for about 3 yrs and had a child & then was able to put down 20% on a $110k house and pay $875/mo which I still think of myself as fortunate as I know there are less fortunate than me. This is not about allocating mine or your monies towards sheltering the jobless or feeding the poor. This is about bailing out people who were irresponsible and our irresponsible representatives who seem to just be interested about buying votes with your and my monies more than they are about what morals they are encouraging and what they are doing to our country and what kind of country we are passing along to my child and yours. This talk is not of hard work and sacrifice (which is the American Dream as I thought it to be) to be able to afford a place to live. This is about being able to live in a place you can't afford. And on top of that, making others pay for it! Nobody wants to see anybody lose their home, but that would assume it was theirs to lose. Unfortunately, what was typical was putting down $0 and taking out loans worth more than 2.5 times their salary. In my book, that home was never really their home in the first place. And it was this indiscriminate bidding by them regardless of cost that drove other responsible people out of the market. This needs to be stopped and not encouraged. If you think of this view as cynical and self-righteous, well everyone is entitled to an opinion. Thanks.
Posted by: Moe Bedard at 10/05/2007 09:53:14 AM
PG is the typical ill informed homeowner critic that has no idea what has gone on over the last 5 years and is going on right now. The basis of his facts are not from facts but how he "feels". News alert PG, many, many, many, many homeowners were paying their mortgage on time until the loan went skyward and adjusted and now the adjustment is what they cannot afford. Sure, there are also many, many people that are in homes they cannot afford and they are there because of what? BAD LENDING PRACTICES and BLATANT FRAUD by brokers and lenders. They will suffer their fate. But to generalize all homeowners in this arena is just an ill informed and uneducated statement. This isn't about bailing people out now, it's about saving our economy and if you don't think housing is STRONGLY tied to ours and the worlds economy, then you better take a look at the signs and get out from under that rock you've been living under because soon, that rock's equity will be stripped and you will have no equity and your stocks will be worthless. Then we'll see you jump over the fence and say, "Maybe this isn't about bailing out homeowners, it's about bailing out our economy and saving it from a massive recession." As you sink in the quick sand, you were trying oh so hard to stay out of, you yell please 'BAIL ME OUT" Have a great day! Moe Bedard Founder & Homeowner Advocate www.LoanSafe.org
Posted by: tony at 10/11/2007 05:52:20 PM
The loans that Moe talks about adjusted skyward because the people holding it bought a house they could not afford! If they could afford the house then they would have been approved for a 'conforming' mortgage. However they were not credit worthy of a conforming mortgage so they used a load which allowed them to buy more than they could affort. The lenders allowed them to pay less than the real cost of the load and house in the first several years, but would recoup the losses in the first several years once the loan payments were adjusted. That is the loan they chose, no one made them take the non-conforming mortgage. If they couldn't affort it or didn't understand it then they should not have signed the papers. There is no way someone can claim that they didn't realize they couldn't afford their homes when they lied about their income, or were buying something they couldn't hope to pay for even at 0% interest. BLATANT FRAUD by borrowers is the bigger cause of the problem. What Moe is talking about is bailing people out. Oh, go ahead and keep your mansion that you can't afford, we'll just make someone lend you money at below market ratest so that Moe can keep his business going. Well all the people that Country Wide is laying off shouldn't have been working in the lending industry to begin with. They were unproductive and did not really produce anything of value. Regarding the recession risk, that is no reason to keep pumping up a balloon, because you are afraid of what is going to happen if you deflate it. Taking Denise at her word, her case is different and hopefully she can get some help. If the system wasn't clogged with the people who over bought, her cry for help wouldn't be so hard to hear. FYI, I'm not a lender nor do i work for one. Just an average person living WELL below my means.
Posted by: Gary at 10/11/2007 06:42:06 PM
Moe - yes, many, many, many folks were making their payments just fine...then WHAM the A part of their ARM kicked in, just like the paperwork said it would that they signed. Most all of them thought they'd make out like bandits when their house appreciated at a boundless rate and they would just re-fi before the adjustment. A gamble they accepted. I have no forgiveness for such gamblers. I don't care if that was the only way they could get into a house...it's not the right way.
Posted by: pg at 10/20/2007 11:40:27 AM
Hey Moe. Thanks for wishing destruction of me and my family. And attacking me personally as ill informed and uneducated. They call that an ad hominem abusive. I would think being as informed and educated as you are you would realize that this personal attack is not a valid argument and what it actually does is shows flaws in the fundamental basis as was pointed out by Tony and Gary. So carry on with your hatred as it eats you up from the inside out.
Posted by: Moe Bedard at 10/26/2007 07:53:50 PM
PG, you are generalizing ALL homeowners as if they all gambled and ALL HOMEONWERS WHO ARE GOING IN TO FORECLOSURE DESERVE IT could not afford these homes. This is like a form of discrimination. It upsets me because I see GOOD people losing their homes every day. Many who have owned theior homes for years. Elderly couples. Yes, I see the gamblers and I HAVE NO SYMPATHY for them. But PG, i am teeling you right now, that a lot of thgese people can afford tghese homes, they just can't afford their loans, once they have adjusted. To me it looks like these views would be categorized with other disciminatory views that go on in our society. Like, all people who have tattoos are bad people or convicts, black people are ALL gang bangers and listen to rap, ALL brokers are sharks. It just isn't REALITY. Sure a few bad apples in a bunch spoil them all, but you can't take that and use it for all walks of life. I was calling your statement uneducated and ill informed not you personally PG. I sincerely apologize if you took offense and again, it was not an attack on you but your BOLD statments. My job is defending homeowners and I take my job and life very seriously. By the way, it doean't eat me away at all. I'm a fun guy. I just use it to fuel my work and my debates.
Posted by: pg at 11/26/2007 04:55:17 PM
Moe, you’ve got some illogic. Perhaps you should go back to ad hominems(never valid argument)again to personally attack me & others here who disagree with you. Most pols use ‘em so you are in good hands. In re to statements “I was calling your statement uneducated and ill informed not you personally PG. I sincerely apologize if YOU took offense” but ”PG IS the typical ILL INFORMED homeowner critic that has no idea what has gone on over the last 5 years and is going on right now.” I highlighted your bs statement to make clear. Do not lecture me on REALITY when you write statements that contradict yourself! And I think this would be a perfect sentence @ dictionary @ generalization which you also fancily accuse me of. Well Moe, people are getting fed up with this garbage as this is what GOOD people have been fed for yrs & now they are regurgitating as country sinks & you want more of the same. I & others get upset when our elected reps think TAXPAYER $$=their personal re-election fund. No problem with homeowners, the problem is your advocacy of homesquatters. When a loan is taken to buy property, there is a lien on that property from people who lent the monies(they can take “your” property til pd back). We do not own this home outright til any mtgs=pd(no guarantees we will be able to pay @ future but we=w/in the 2.5x salary which I know you advocate,no?)nor do those facing foreclosure(apparently=virus that homesquatters catch which has nothing to do with their ability to pay loan back as per contract they signed). So this=no sense”I see GOOD people losing their homes every day.” They NEVER had the home & good people make mistakes too.
Posted by: Joe at 12/01/2007 03:07:31 PM
Moe, this is Joe. This affects hard working adults like me. We did not buy a house we could not afford. Our interst rate was 6.8 percent, which is probably more than yours is. But its now been jacked up to 9.9 percent. This is the banking industry trying to rape people of their income. They make millions in interest each day. And they are defrauding the american consumer. The banks deserve to go under. Its not the homeowners at all. Get it right.
Posted by: phillip johnson at 03/02/2008 06:48:12 PM
The government has no business to come along behind people who made un-wise financial decisions. These people wanted more home or a home in general and couldn't afford it, now the payday has come in the form of foreclosures at a record rate. i don't like to sound un-compassionate but a legal contract is a serious instrument to be carefully entered into with sound judgment. I resent any of my tax dollars now and in the future to pay for this housing crisis. People need to learn to live within their means.
Posted by: joycelen at 03/07/2008 03:24:50 PM
While all the blame is being flung around, why do people not see the involvement and guilt of real estate agents? In our area, they actually prodded and pushed people to exotic loans. Think about it---they made their money, now the home owner is paying!!!
Posted by: nanette geary at 04/09/2008 01:07:31 PM
I agee with Philip. Greedy homeowners didn't read the fine print. Just another example of not heeding "caveat emptor".
Posted by: Bill at 10/06/2008 02:38:19 PM
To Phillup and Nanette Yes I'm trying to provide my family with a home that now is worth 20 percent less then what I owe , My wife and I have been laid off 4 times in the last 2 yrs because of this crunch. when we bought this home it was well within our means so stop blaming hard working people who try to do right for the families. everything had gone up , gas , utilities , groceries, heating oil. what is the government doing about hard working families where we may lose our home? Explain to me why you are so much better then the average working family?
Posted by: Bob at 12/23/2008 06:11:02 PM
If the lenders have written down these loans and now have a portion of the 700 billion to begin new loans--wouldn't it make sense for them to work with the homeowner no matter how small the profit margins? For a decade now we have all been living in a house of cards--it is time for a new deck with new incentives. I am not an economist I just love this country and my fellow Americans (hard working partiots) who are now financially threatened.