By Jim Spencer
SpencerSpeaks.com
While the Federal Reserve tries to rescue the stock market from the collapse of subprime mortgage lending, the Congress is trying to save some of its victims.
A bill passed Tuesday by the U.S. House of Representatives will allow some people on the verge of foreclosure to refinance their home loans for longer periods at lower monthly payments.
In what could turn out to be a campaign issue in
The bill lets the Federal Housing Administration, known as FHA, lend higher amounts on government-insured home loans for up to 40 years. The move, approved by a 348 to 72 vote in the House, lets qualified borrowers move from unaffordable adjustable rate mortgages with ever-increasing monthly payments to fixed payments for the life of a loan.
“These are not no-doc loans,†Colorado Congressman Ed Perlmutter said, referring to certain subprime mortgages that gave hundreds of thousands of dollars to borrowers without documenting their ability to repay. “You have to demonstrate income with tax returns and all the other things we used to require to insure that you can re-pay.â€
There is also a counseling component in the law that helps borrowers understand fine print.
These parts of the legislation are critical.
If folks borrowing money simply lack the means to repay, raising the amount government-insured lenders can provide because housing stock in
The problem with too many subprime mortgages was that borrowers and investors didn’t know they were houses of cards. The subprime loans often went to people who mortgage brokers, real estate agents, builders and other middle men knew would default. They just didn’t care. After everybody else took their cut in the form of generous commissions and fees, the financial risk was passed on to borrowers and investors in mortgage-backed securities. Investment firms packaged bad loans with good loans in ratios that brokerages thought would overcome the risk of an overall collapse in the home mortgage market.
They were very wrong.
As teaser interest rates went up and monthly payments skyrocketed, already unqualified borrowers could no longer make their mortgage payments. Houses of cards collapsed and buried many of the financial institutions that had invested in mortgage-backed securities. Some had to suspend withdrawals by investors because they didn’t have enough cash to cover the runs. The Federal Reserve had to step in after mortgage defaults started to devastate the entire world securities markets.
Even as the House tried to save the American Dream, the prognosis remained iffy.
“This is not a silver bullet,†Colorado Congressman Mark Udall acknowledged of the homeownership act. “But it sends a message to consumers and the markets that we’re taking action. There is a psychological mindset that things are going in the wrong direction.â€
It is more than a mindset. As the new housing bill passed Tuesday, Bloomberg business news reported that “the number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier as subprime borrowers with adjustable rate mortgages saw their payments rise.â€
The answer here involves more than easy money, more than letting FHA insure higher loans because housing prices in states like
Save some money for a down payment. Plan and stick to a budget. Above all, buy what you can afford.
Along with whatever Congress or the Fed need to do about the subprime lending scandal, that will be the best way to buy – and keep – a home.
Copyright 2007 by Jim Spencer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.
8 users commented in " Real Answer to Mortgage Crisis Lies in Delayed Gratification "
Follow-up comment rss or Leave a TrackbackI see Jim continues to tow the line
on the mortgage default issue. That being
that the “problem” all hinges on the bogy
man called subprime loans. WRONG!
The subprime companies made their profits
during the last 10 years, they did very
well. When property values started to
adjust, as they should, since real estate
has been rediculously overpriced in many
markets since the late 90’s, the subprime
companies cut and ran.
The dirty truth is that most forclosed
loans are FHA or VA loans, that is insured
by the taxpayers. Nobody wants to talk
about the fact that as Washington has tried
to cram the idea that EVERYBODY is entitled
to own a home down our throats, it is
government insured loans which have
loosened the underwriting, credit and down
paymentment requirements to irresponsible
levels. FHA and VA has become a no down
payment loan with lax credit requirements
and lax income requirements. The result?
Rampant foreclosures on Taxpayer insured
loans. Many never have a payment made
before they go into foreclosure. But
lenders and Realtors have already made
their commissions. And guess what? They
can turn around and sell the property all
over again to the next unqualified buyer.
Take a look at he FHA “Preforeclosure
program” for instance. Under this program
the homeowner on the verge of foreclosure
gets and incentive (from you the taxpayer)
of $500 to sell his home on which he is
at least three monthes behind on the
payment. The Realtor only has to pay the
BANK 82% of the CURRENT APPRAISED VALUE
which these days is LESS THAN THE CURRENT
MORTGAGE BALANCE. This results in a
DEFICIENTCY of around 20 to 40%! On a
$200,000 loan were talking about $40,000
to $80,000 which YOU THE TAXPAYER have to
pay the BANK for the borrower to get out
from under the loan he/she never should
have qualified for in the first place.
As usual the taxpayer picks up the cost
of bad policy and they don’t even know
they’re getting screwed. This is called
government waste and corruption.
Now these idiots want to allow YOU THE
TAXPAYER to underwrite and insure even
MORE bad loans! You’re getting screwed
and even SPENCER isn’t allowed to tell you!
dennis hammond
Jim,
I encourage you to go and read the bill rather than listen to hearsay as to what it accomplishes. It does so much more than “raise loan limits and extend terms”. It gets rid of downpayment requirements for FHA loans. Maxine Waters has been pushing this for some time to promote home ownership among those that cannot afford to save for a downpayment. It actually loosens the lending requirements that you have been promoting. Read it Jim.
Jim,
Maxine waters. Yeah that’s someone I want
handling my checkbook. As for any Change
to FHA underwriting or “down payment requirements” as I stated, they’ve already
turned the program into a “Giveaway for the
POOR!” You can call FHA–Subsidized housing
for the poor and unqualified. Noidea clearly
identified the agenda of the American
Socialist Party (Democrats) “From each
according to their ability- to each according
to their need” and a free house at taxpayer
expense.
Thanks for aptly clarifying that Noidea!
So Jim, on this one..if it is a campaign issue you clearly would come down on the side of the Republicans that voted against the bill. The Dems who voted for the bill in Colorado see no need for down payment…obviously against your opinion of skimping and saving and “delayed gratification” .
What is most interesting about your editorial is your conclusion that what is necessary is for people to get smarter. Well, yeah!
Ultimately, the inevitable result of any democracy is mediocrity. “Return to the mean” rules. Of course, even as people do get smarter (if they do, which certainly wasn’t apparent in the last election), the mean simply rises and we have the same problem.
What’s the solution? Drink. Do drugs. Fry your brain. Don’t worry!
Jim,
As a mortgage professional with seventeen
years experience in the Denver metro real
estate market, I can tell you the loan
underwriting and qualification process
exists not only to protect the investors or
taxpayers but also the prospective borrower
or home buyer. The traditional
qualification process determines if the
prospective home buyers are ready and
capable to engage in home ownership and
the disipline and responsibility which
accompanies this significant undertaking.
Borrowers were rated on five categories:
1) acceptable credit history:
First time homebuyers were scrutinized
specifically
2) adequate income:
debt to income ratios include the
proposed mortgage and all installment
debt and revolving debt (like credit
cards) Income was documented with paystubs
and W-2’s not simply stated on the ap.
3) Time on the job:
In the past, two years of consistent
employment was the minimum requirement,
employment gaps had to be adequately
explained (for self employed it was FIVE
years with NO decline in income.)
4) Down payment:
An adequate down payment had to be in the
bank, documented and SEASONED indicating
that the borrowers SAVED the down payment
from their income. 3 to 10% of the sales
price was the norm. First time
homebuyers were never allowed less than a
10% down on conventional financing, 3%
for FHA. Gifts toward down payments were
limited.
5) Reserves:
Borrowers had to document that after
closing they had in the bank 6 months
worth of payments, just in case their
income was disrupted or the borrowers were
laid off or fired from their jobs.
These underwriting criteria have largely been
replaced by what are called “Stated income”
loans for conventional financing and in
many cases automated underwriting on both
conventional and Government loans.
The net effect is much less scrutiny and
much lower qualification requirements. These
criteria are not PUNITIVE they serve to
determine if borrowers are SUITED for home
ownership or if they are very likely to go
into foreclosure. Forclosure serves no one
except those who profit from “Churning”
foreclosure inventories.
Throwing common sense underwriting out the
window to lower the bar for prospective home
buyers is akin to throwing the baby out with
the bath water and has served to send
default rates through the roof and cost
taxpayers a fortune.
A fact of life is if you don’t meet the
qualifications for loan approval you
aren’t cut out for homeownership.
And as a matter of fact not everyone is
responsible enough, stable enough or has
adequate earning power to buy a home.
And that’s just the way it is, despite how
hard liberals and politicians seeks votes
might close their eyes and wish.
I don’t believe many lenders checked the criteria for homeownership as well as Dennis.
I began seeing signs a few years ago” no down, no qualifying.” There were clearly very poor judgments made by the lending industry. And it was all over the internet and junk mail and t.v., “refinance, 2nd mortgages,pay off bills, remodel”.. Sadly, many people fell into this trap and siphoned their equity. The ARM mortgages took too many of them by surprise when they did just that, adjusted the rates, higher of course.
What do we do now, let more homes go into foreclosure, devaluing the property of everyone else? Or try to help them keep their homes? I know, responsible taxpayers pay either way.
And how many banks have loaned money to scrape off and build the McMansions that are sitting in SE Denver now, most of them empty? Since they are priced upwards of $1,000,000, how many people who work in Denver can really afford them?
There is a gaping hole in the ground 2 blks. from me, the contractor scraped, but noone built. And there are 2 McMansions with for sale signs in the next block.
The banks are going to take another tumble on these spec homes.
Things will never get better until people have to PROVE they have the income to support the loan they are after.
And MUST have at least 10-20% down in cash assets.
Seems the way to go these days is to buy what you cannot afford no matter the consequences and not take the time to work your way up to a larger better home.
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