My post yesterday "I'm just asking . . ." elicited many thoughtful comments. So many comments in fact, that I thought another post is the only way to do justice to the issues raised by my readers.
This new and largest yet mortgage refinance boom will help homeowners with a significant equity and great credit. People got that way because they are careful with their money and responsible with their obligations. Helping people of this character will certainly increase the odds that the economy benefits.
There are millions of homeowners, many of them young families and single parent households that are also careful with their money and responsible with their obligations. Unfortunately they live in any of a number of other places where housing values have declined and they now are upside down. Most of these families cannot refinance and increase their disposable income; even though they are still responsibly meeting all their obligations.
I am not pleading on behalf of people who live beyond their means and must pay the price for that lifestyle choice. Nor am I advocating against the homeowners who can refinance now.
I'm just really bugged about the unfairness of it all. Responsible families, who would benefit the most and in turn benefit the economy most, are shut out. They're making their payments at higher rates; I'll think they'll make them at a lower rate as well. If taxpayers weren't spending half a trillion dollars to help someone anyone, I would not be particularly bothered by this. So is the government making the wrong choices? Helping the wrong people? I'm just asking.
Lenn Harley astutely noted "that negative equity is the elephant in the room." Could some of the taxpayer funded bailout be used for kind of credit insurance or incentive? Help responsible families? I'm just asking.
Readers mentioned streamlined FHA refinances. No appraisal needed. Regrettably, you need to already have an FHA mortgage. In the few years prior to the subprime collapse FHA's share of all mortgages made is under five percent. Almost all low down payment transactions used piggy back second mortgages or some PMI. Those transactions cannot be refinanced with an FHA loan unless an appraisal shows minimal equity in their property.
Do we help any of the other responsible borrowers without FHA mortgages? I'm just asking.
It's been widely reported that ten percent of borrowers are at least one month late making their mortgage payment. Do we help a portion of the other responsible 90 percent who might benefit from lower rates but can't? I'm just asking.
I'm just asking and you're just commenting. Thanks to Active|Rain for creating a place we can discuss this in such a thoughtful and civil manner!
However its the same thing with welfare the family that needs it because something happened, is responsible, and only needs it to catch up cannot get it, but the person who has no motivation in life other then to find a new way to milk the system sits on it for their entirety.
Hey they should have taken the whole tarp . Divided it by us all. If you had a mortgage the money would go t pay that off . You get whats lewft over. If you walked away from a house in the last 3 years the money funds the dif . Every body else gets a check. The result? liquidity and the end of the recession. You can say well it would have caused inflation. But we were going to spend the money anyway. So what di dwe do? We gave it to the guys that made the mess!!!
I have been saying for several weeks that if everyone who is current on their mortgages could just reset to a lower rate, think of the economic stimulus that would provide - 100s of dollars monthly - so much better than the $300 tax refund - a one time shot that goes to pay for one monthly Visa bill.
Hi John,
These are all great questions and I too am so grateful that AR gives me a place to have my voice heard as well as to facilitate a healthy debate.
I have "talked" with Lenn before about this housing crisis, I still contend that simply writing down loan principle which would cost over $5 trillion if we were to write down $25K for every home in the United States, is not the solution.
Nor is simply offering lower rates as this doesn't solve the housing supply and demand imbalance.
What we need is a true housing stimulus that would provide an incentive for Americans to invest in real estate and increase sales, both existing and new, which would get the inventory "off the books."
Until the housing supply and demand imbalance is brought back into alignment, we are going to be spending trillions of dollars and we are not going to be making much progress moving the economy and country forward.
Not to be contrary, I'm just asking...
That young responsible family, just starting out and paying their bills, probably didn't sign off on a sub-prime mortgage loan with a rate that would soon adjust to unaffordable levels.
That responsible family either saved up the 20% and went with a very reasonable fixed rate, or layed down less, figured on paying PMI for a while, and still signed onto a reasonable fixed rate mortgage loan. While they may have bought at an unfortunate time, and may be upside down, that will eventually change if they are home. By home, I mean the place where they plan to live and raise their kids.
I realize that jobs and circumstances necessitate moving for many, and that there are a multitude of other factors that may have put responsible people in a pickle.
Maybe I'm just a little jaded. I saw too many people cashing in their equity to pay for past excesses - and then more for future excesses. But I am not yet convinced that there are a large number of responsible borrowers that need bailing out.
This is not to say that I believe the first installment of TARP money was wisely spent. I find it infuriating that it was given to corporations that were too big to fail - to use it to become waaay too big to fail.
My grandfather was sitting in a boat with me and he said, Jan just remember life is not always fair. You can do all the right things, but sometimes, no fault of yours, it goes upside down. The trick is to see it coming.
Words to live by, right? Well, I finally saved to buy some townhomes and be an investor, outside of my personal residence. A mortgage broker sent me an email, saying he knew I had bought in the wrong year, and how would I like a 4% fixed mortgage. I sure would...but I have an investment property. Oh, he knew a lawyer and for $3750, upfront, he could convince the bank to reconfigure my loan. I said, well for 3750.00 that doesn't make me less upside down. He said, well I think I can help you.
My grandfather also said, if it sounds too good to be true, it probably is.
With todays' new values, my investment is probably equal to my mortgage, but as long as I have a renter paying the majority of the payment, I think I'll hold. This 5 yr plan may become 10 but I don't think it's right to go to the bank and ask forgiveness.
I guess sometimes life isn't fair,
Your post is very thought-provoking. There is so much good that could come to people if they could refinance with these low rates, but so many without the equity to do so, but so much money to prop up the banks and not the individual.
I find myself torn on this entire topic. I know that life isn't always fair. In this mortgage fiasco there are things that are just not right. Here is an example: two actual properties, next door to each other in a Westchester County, New York location. Both are listed on MLS and are "short sales". I did some research on the property because the price was excellent as an investment opportunity. In both cases, between 2005 and 2007, there was refinancing and home equity loans taken on both properties. Today, the amount loaned exceeds the value of both properties. I question if the value loaned was ever equal or close to what was given to these borrowers for their property. It is not right that these borrowers were allowed to borrow the amounts they were given. They had to fail. These two examples are not the exception but the norm with all the short sale properties I have researched. It is not right that I, as a taxpayer, will be bearing the burden created by what can only be called GREED.
There has to be a better way to fix the problem than an across the board bail out. If your taxes are too high, you can apply for a tax certiary. Can't we come up with a similar solution to the mortgage situation? This would help the job market as it would provide work for real estate attorneys who are currently struggling for business.
Thanks for the post and letting me add my opinion.
Morning John, You're right about the unfairness of it all. Responsible owners didn't create the problem and probably won't get any benefit from any solution.
I just spoke to a lady who's husband has left, and she called her bank to get a loan modification in November. They told her they only do that for people who've missed at least one payment. So she missed one - her first missed payment. When she called back they told her they'd changed their policy and only give modifications to people who haven't missed any payments! If this type of scenario could be handled by real, live people who could listen and make a fair and rational decision on a case by case basis, it would improve things a lot.
John, you're just asking a lot of common sense questions. That's the problem. The people in charge don't have any common sense.
Again, it looks like those who complain the most are helped. I am talking about loan modification. There are some lowyers with a high success rate in reducing not only the interest rate but also the loan balance.
Does it mean that there are resources available but they are not used by the banks? Why do people have to use expensive lawyers to be able to modify their loans since banks got the money from the government to do so?
This is so true. The refi boom will be awesome. It actually rewards people who did things the right way. What a shocker.
Thanks to all for your comments. There's lots of opinions and many of you have the same questions that I have. After carefully considering everyone's comments on both of my posts I've come away with two conclusions.
First, supply and demand for housing is the one fundamental metric that needs to return to historical norms before we'll be past our problems. Many things affect that; completion of the current foreclosure cycle, an end to the recession, renewed confidence in our financial system to name three important ones.
Second, cheap credit primarily for homeowners with substantial equity will not alone provide enough stimulus to address the supply and demand imbalance without some corresponding easing of loan underwriting requirements (more risk taking or a different risk management scheme by mortgage investors) for responsible people with good payment histories, but less equity.
With a new administration in Washington, I'll be watching to see who they deem to be lucky and deserving of help and whether their plans actually accomplish their goals. And what, if any, will be the unintended consequences of their policies.
Regards, John
While there are plenty of credit problems due to poor money management, we easliy make universal assumptions about the entire market that can lead us to false conclusions. This happens as a result of not asking enough questiions, or perhaps trying to read too much into the market without enough information. A word to the wise - not everything you hear or read in the press is the full story.
For example, the credit crisis in Northern Colorado started with several years of numerous layoffs in the high tech sector. These individuals were making good money, had good credit, many had long standing, distinguished careers, and basically had the rug pulled out from under them. There were not enough job options in their field of endeavor to absorb the large number of layoffs that occurred. The lucky ones early in the layoffs moved away and found jobs elsewhere in their field, while they were still to be had. The rest became members of the walking underemployed, as they settled for jobs well below their previous pay scale or outside of their original field. This started the oversupply housing train in our area, and it accelerateed as values started heading downhill. As those folks stopped buying commodities and going out to eat, we saw the closing of retail businesses and restaurants that followed. Ripples went thorugh the entire economy.
The later years of layoffs left those highly skilled wrokers with fewer options. Declining property values, unrealistic refinance appraisals, and the resulting decine in credit left many of these individuals in situations they were poorly equiped to deal with. A skilled worker with a job transfer could not clear their mortgage in a sale or rent the property to cover it. Remember, these were once the 700-800 plus credit scores that got these loans in the first place. They were not the B and C paper borrowers we often hear about. As time went on and the credit crisis worsened, they swept others with declining values with them in the rising current of foreclosres and short sales.
Making quick assumptions about the context of the credit crisis, while making good coffee talk, can blind us from some of the necessary solutions to the problem. Unemployemnt is easy to discern, but underemployment is very difficult to measure and is rampant in this economy. Sure, the overextenders got caught up also, and there are a lot of them. Remember, times were good and money was easy. They had no concept of saving and were part of the "entitled generation".
The challenge of putting people back to work in meaningful jobs at a decent pay scale is the historic underpinning of correcting any major credit crisis, just as it was in the Great Depression. This is fundamental to "the cure". You can bail out banks and auto manufacturers all you want, but at the end of the bail out money, the consumer has to have jobs that support buying houses, cars and commodities or it is only a temporary fix.
I realize the people who were insightful enough to save like crazy or lucky enough to not have lost their job should get a well-deserved pat on the back, but we have larger issues for the bail out money. It is natural for all of us to aks "why can't I have some of that moeny" but the fact is, this is one hell of a problem to fix.