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Community Comment

The Mortgage Crisis…where to turn?

Good morning, Netizens…

I have really mixed-up emotions about real estate foreclosures in our present economy. At first glance, it seems pretty much straightforward that defaulting on a mortgage, even a poorly-conceived and perhaps even fraudulently-written mortgage leads to foreclosures that push down all house prices. Those falling prices — combined with falling incomes and another expected surge in monthly payments on adjustable rate loans — will surely lead to more defaults and deeper price declines, threatening bank solvency and prolonging the credit crunch. Yes, sure.

As I see it, the financial situation is not going to get any better until house prices stabilize and the banks are not going to loan money until the seeping cesspool of failing mortgages ceases.

Last year, in their typical manner, the government sought to solve the problem by throwing money at it, which didn’t work, although the loan-by-loan renegotiation of bad mortgages is showing some signs of rectifying matters.

The F.D.I.C. has developed a plan that is being used, with limited results, to rework defaulting mortgages at IndyMac, the failed Southern California bank. Under the plan, the banks restructure troubled mortgages — lowering the interest rate, extending the loan term or deferring payment on a portion of principal — so that they’re affordable. The goal is to reduce the monthly payment to about a third to two-fifths of a borrower’s after-tax income.

However, as I see it, it is rapidly becoming a dead-heat race between patched mortgages and rising unemployment. There comes a point when, no matter how you massage the interest rates, fiddle with the loan terms or defer payments to make a poorly-conceived mortgage more affordable, the ugly question arises, how can you make a mortgage work when the borrower’s income is falling below poverty level income? You cannot.

What might make things work is to permanently modify troubled mortgage loans. That is the only way that we can keep Americans in their homes, save the banks and thus stabilize the economy. The mindset for this deal also benefits mortgage lenders and investors, because, over time, the new loans would make more money than would be recouped in a foreclosure. If the loans default, the government (that is the taxpayers) would share in the losses.

That, of course, leaves the door wide open for unscrupulous homeowners to deliberately default on their current mortgages in hopes of getting a better deal from the lenders. Although the plan also only applies to people whose mortgages are not affordable based on their income, given sinking employment rates, the number of people who qualify for mortgage modification might rise. Would some freeloaders sneak in? Given hard times, you betcha!

Facts as I see them

Most of these troubled mortgages were written for people who did not qualify for a traditional mortgage to begin with. They should have never happened.

The rising unemployment may trigger even more default on their mortgages. If the government can reverse unemployment, you might stand a chance of fixing the mortgage crisis.

How do you think we should fix the mortgage crisis?

Dave


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