Mortgage Upheaval…. A cure for all ‘troubled’ borrowers, deserving or not?
Big news today from Washington DC.
Finally some serious consideration of across the board rescue and revamping of mortgages for ordinary people....not just the corporations that are holding them hostage to predatory loans. and not just owner occupied homes! It remains to be seen if the reality is just more empty chatter from Congress.
So far the only relief, rescue or satisfaction for anyone involved in the mortgage meltdown has gone to lenders and banking interests. Much to the outrage of taxpayers on both sides of the fence.....those who feel the chips should fall where they may, and those who have fallen into the foreclosure pit and deeply resent their tax dollars going to bail out the very financial institutions who are about to wreak financial havoc on their families, while any help for them, the borrowers, is just so much smoke and mirrors.
Who is worthy of a bail out?
The Federal Reserve has made drastic and expensive $30 billion fast-fading U.S. dollar moves to avert Wall Street giant, Bear Stearns' black hole implosion, and also thrown very near the same amount in loans at J.P. Morgan's serendipitous windfall purchase of Bear Stearns. We regular folk have to wonder, when the talk comes down to who deserves or is worthy of rescue...do these failing investment banking enterprises really qualify? The learned consensus was that it is a moot point, as without a bail out intervention our whole economy would topple like dominoes. The cold hard truth is that the beneficiaries of the bail out were wealthy creditors and J.P. Morgan shareholders.
But all this has done nothing to stop the onslaught of individual borrowers' defaults and foreclosures. Which ultimately trickles uphill to Wall Street and further exacerbates the mortgage industry and investment banking debacle. If they expect borrowers to be responsible.....why aren't they?
All Loan Re-negotiation Policies have so far been voluntary on the part of a small handful of lenders, and they are overwhelmed, understaffed and often unwilling to offer any real relief to borrowers they deem undeserving....a vague term in light of the millions of borrowers they did approve for questionable and often predatory terms. I have written other hubs about the realities and ordeals that borrowers are suffering at the hands of negligent, uncaring, and untrained "negotiators'.
And so far Congress and the Bush administration have made only baby steps to relieve the source of the floodwaters rising at America's fiscal levies... low and middle America's inability to cover their newly increased home loan rates, budget for inflation and the rising cost of everything.
Saving "The farm"...your family home!
So now the U.S. House and Senate are reviewing and considering massive and sweeping interventions in the form of government-backed refinances for millions of borrowers, and they are taking the deservedness question out of the mix. The federal government would in fact take over the risks of borrowers, lenders and investors. The end goal is to shore up plunging home values.
The two stage plan would start with the Senate likely passing of a modest financial aid package for borrowers. In ensuing months Congress would legislate $300 billion or more to guarantee re-vamped loans.
Senators Frank and Dodd have proposed a bill for a New Deal type program. To participate, the lender would have to cut the principal of a troubled mortgage to 85% of a home's current, diminished market value. The FHA would take 5% of the new, lower amount as a fee. Homeowners would get the remaining 10% as equity to give them a stake in paying off the renegotiated mortgage.
Borrowers would have to prove that they had the financial wherewithal to keep up with the now-lower monthly mortgage payments. Those who couldn't prove they could pay would be ineligible for the program. If borrowers failed to pay the new, smaller mortgage, Washington would do so.
This plan presupposes that borrowers, who live now, in real time, trying to find any way they can to pay the now higher mortgages, have not run up bad credit in other areas. Like credit cards. Most have done just that.
This is not a move that investors in mortgage back securities, or mortgage industry lobbyists will sit quietly and accept without some howling. Now you've got to wonder why, if they don't want foreclosures, and don't want the house back....why would they fight these measures meant to shore up property values and keep American families in their homes and their jobs. Still many economist hold forth convincing arguments that the U.S. economy will not recover unless something is done to stabilize house values.
The dilemma for all would be rescuers and re-negotiators is the pressing question of who is deserving of help. That question is one that has stymied governments everywhere, through the ages.
But a widespread bail out for individual borrowers and those in financial distress is not a new concept or practice. In the late 1700's and again in the late 1900's congress legislated relief for citizens after financial panics. Again in the Great Depression, and in the 1980's Saving & Loan crisis...government came to the rescue. During the Great Depression a federal agency, Home Owners Loan Corporation helped over one million borrowers refinance their loans as part of FDR's New Deal. The program, when it shut down in the 1960's had paid of it's debts and expenses and shown a profit which it returned to the federal government.
Regardless of how deserving the defaulting or at risk of defaulting borrower is, Washington DC appears to realize they must treat individuals as they have treated big banking enterprises: don't bog down in who deserves and who doesn't, just get the ball rolling and save us from another Great Depression. There is plenty of evidence something even worse than the ‘30s could happen here in the U.S. and with a global economy we'd take the rest of the world down with us.