Spokane7
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September 7, 2011 in Opinion
Editorial: Mortgage reform essential to recovery
The financial crisis of three years has never really gone away, and the global economy continues to tremble from the aftershocks. Whatever jobs programs President Barack Obama might announce Thursday are unlikely to clear the debris.
In fact, lawsuits filed Friday against 17 mortgage lenders will increase the pressure on an industry simultaneously groping for solutions to Europe’s sovereign debt crisis and carrying millions of loans on homes worth less than the principal.
Lenders are laying off thousands of workers, perhaps as many as 40,000 at Bank of America, from which the Federal Housing Finance Agency is seeking $57.5 billion. The agency’s total claims for mortgage securities gone bad approach $200 billion.
Suing banks poses little political risk. Public resentment toward Wall Street’s overpaid kingpins remains hot. The fact that FHFA’s Fannie Mae and Freddie Mac helped inflate the housing bubble by buying up questionable, often fraudulent, mortgage paper has contributed to the overall erosion of Americans’ confidence in their government.
But distressed housing markets around the country are probably the No. 1 drag on consumer confidence – and on the miserable job market.
That homeowners can no longer finance spending sprees by tapping into their home equity is a good thing. That millions are immobilized financially and professionally in houses they cannot afford but cannot sell is a very bad thing. Lenders are likewise in a vise, unable to sell thousands of foreclosed homes lest they push prices still lower and more borrowers underwater.
Administration efforts to find solutions have largely fizzled. The Home Affordable Refinance Program has helped fewer than 1 million homeowners. But millions could benefit if borrowers could access record-low rates that would reduce monthly payments by hundreds of dollars – increasing their overall financial well-being and, hopefully, stimulating spending on other goods that would help the broader economy.
To make that happen, the FHFA is going to have to be more flexible on fees and terms, including refinancing up to 125 percent of a home’s value, one of the practices that triggered the housing collapse in the first place. Because rates are so much better, owners’ monthly payments could be lower.
Potential modifications to his earlier mortgage initiatives are reportedly on the list of measures Obama may announce Thursday. They would be well-received if carefully fashioned to balance the needs of the homeowners, their lenders and the nation, which so badly needs a stabilized housing industry.
Sound solutions have the potential to undo some of the damage done by the speculation, fraud and greed that have so much to do with the economic fix we find ourselves in today.
To respond to this editorial online, go to www.spokesman.com and click on Opinion under the Topics menu.
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gmorton on September 07 at 11:00 a.m.
No, you don’t “help” the housing situation by increasing the federal debt to underwrite, insure, or guarantee mortgage loans for 125% of the value of the property. That is the very sort of economic idiocy that created the bubble and crash in the first place.
The housing market can only correct itself. There are presently something like 7 million excess units on the market, a result of the government’s 20-year-long policy of encouraging and underwriting “affordable” housing. The market will not recover until those units are absorbed. They will not be absorbed until their prices fall to match their value, or until some recovery occurs elsewhere in the economy.
Lenders holding “underwater” mortgages which are in default have two choices: they can foreclose, and thus be saddled with another property they must sell at a loss if they can sell it at all, or negotiate with the buyer to reduce the balance, extend terms, reduce the interest rate, or some combination. In many cases they will realize a smaller loss by so doing than by foreclosing. Only the lender can make that assessment, for each individual loan on its books.
Government created the housing crisis, by pressuring lenders to relax lending standards, buying up and “guaranteeing” the worthless paper, and holding interest rates near zero. It will only prolong and exacerbate it by further meddling in the housing market.
johnclarke on September 07 at 3:12 p.m.
er, Gmorton I do believe that once again you are wrong. Shocking, I know. However, the housing crisis was created by greed, greed and greed. The government did not force anyone to sign for a house they could not afford. The government did not make false appraisals or force people to buy mortgage backed securities that were given crap ratings. Now if you care to level blame at the gov’t, I suggest you look at some deregulation history that did make much of this mess possible. Two places for you to start your education.
Garn–St. Germain Depository Institutions Act
Gramm–Leach–Bliley Act
Now, I know that some believe that “gubmint needs to get out of the way” and the free market will police itself. Sounds good right? Unfortunately, gubmint sort of dropped the ball here because of the crooks behind these repeals were in the government. Normally, this is where a fine gentleman like yourself might say “well the CRA caused all this by making bank lend to poor people”. Fact: Only 6% of all sub-prime loans were made under CRA and actually less CRA loans default than the average of all sub-prime.
In closing, goverment did not “cause” the problem but certainly “government” is paying for it, meaning me and other tax payers.
gmorton on September 07 at 7:31 p.m.
johnclarke wrote,
“However, the housing crisis was created by greed, greed and greed.”
Sorry, John, but “greed” is simply a term of disparagement for the desire to realize the maximum possible return on one’s investment (of time, effort, or money). This may surprise you, but that is the motive for all economic activity.
“Fact: Only 6% of all sub-prime loans were made under CRA and actually less CRA loans default than the average of all sub-prime.”
CRA was not the primary problem, John. It was, after 1995, merely a contributing factor (it pressured banks to relax lending standards). The primary problem was the mandate to Fannie and Freddie to increase the fraction of “affordable” mortgages in their portfolios to 52%. At the time of the collapse they held or guaranteed about half of all outstanding subprimes.
Better read Morgenson and Rosner’s book, John.
http://www.amazon.com/Reckless-Endangerment-Outsized-Corruption-Armageddon/dp/0805091203
spokanelaw on September 07 at 7:58 p.m.
Preventing another similar financial bubble is simple. First, regulate derivatives and split the commercial banks from investment banks. Then, end subsidies to investment banks immediately. Finally, commercial banks should only receive subsidies under the same conditions as were offered during the successful bailout of the auto industry. That is to say trade subsidies for an equity position among other conditions. None of this will happen because our political system is corrupted by money. The only thing individuals can do is vote against candidates who thinks corporations are people.
gmorton on September 07 at 8:11 p.m.
spokanelaw wrote,
“Then, end subsidies to investment banks immediately.”
Good idea. Also end them for artists, scientists, local gummints, “green” energy boondoggles, Amtrak, farmers, NPR, ethanol producers, local transit systems, local school districts, and irresponsible parents.
“The only thing individuals can do is vote against candidates who thinks corporations are people.”
Hmmm. I always thought corporations were groups of people, just as are garden clubs, the Kiwanis, the Boy Scouts, football teams, labor unions, and societies. What do you think they are? Martians?
bdr on September 07 at 11:19 p.m.
Seems if you’ve watched the news lately housing is going back up.
Al Gore predictions of wild weather are coming true and decimating whole housing markets on the east coast.
Texas is burning up housing faster than it can repo.
Midwest housing is nothing but toothpicks after tornado’s..
Just wait a few years housing will recover by attrition.
America was overbuilt anyway and mother nature is leveling the market. QUICK
Retiree on September 08 at 1:23 a.m.
As a former bank examiner, I don’t have much sympathy for banks and their management. But, your editorial omits one glaring fact – the financial cost to the mortgage holder to refinance to today’s lower rates.
According to recent online information the average life of a mortgage loan is about 5 years. A median cost for a home in Spokane is about $118,287. Five years ago the average interest rate on a 30-yr mortgage was 6.2%, today it’s about 4.2%.
If you run the numbers on 6.2% vs. 4.2% over five years, the bank loses $11,771 in interest income while the borrower repays an extra $3,010 on principle. It really doesn’t what the actual numbers are, the bottom line is banks lose interest income. That’s why modifications aren’t working.
The borrower may have an extra $11,771 to spend, but the bank has $11,771 less income. Who in their right mind will forgo $11,771 worth of income to be a nice guy? If you want to help the borrower, you also have to pay the devil and help the lender. Otherwise banks will continue to be reluctant to lend and new businesses origination, business expansion, and jobs will continue to lag and fizzle.
johnclarke on September 08 at 4:32 p.m.
“Sorry, John, but “greed” is simply a term of disparagement for the desire to realize the maximum possible return on one’s investment (of time, effort, or money). This may surprise you, but that is the motive for all economic activity.”
Er, In spite of your long years on the planet Gmorton, you just don’t seem to get basic concepts of human nature, and apparently recent history. Greed, while perhaps the reason to try to aquire more stuff, must be regulated and regulated by an authority with the power to stop greed. The key regulatory destruction acts passed by the fans of free market enabled the greed. The Canadian financial system suffered none of the failures ours did, because they are 1) satisfied with reasonable returns and 2) heavily regulated to prevent the idiocy that happened here.
I don’t need to read the book you are suggesting, because I know what caused the problem. Freddie and Fannie don’t originate loans, duh - they just buy them so lenders can continue the same greedy process all over again. You might want to try this.
http://en.wikipedia.org/wiki/Subprime_crisis_impact_timeline
What you are refering to with Freddie and Fannie represented a 6% increase in their portfolio. Hardly the stuff of a meltdown.
2003-2007: U.S. subprime mortgages increased 292%, from $332 billion to $1.3 trillion, due primarily to the private sector entering the mortgage bond market, once an almost exclusive domain of government sponsored enterprises like Freddie Mac.The Federal Reserve fails to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability), emphasizing instead lender’s ability to securitize and repackage subprime loans
Hopefully, you can read that timeline and understand a little better. Good luck, Mr. Free Market.
gmorton on September 08 at 4:58 p.m.
johnclarke wrote,
“Er, In spite of your long years on the planet Gmorton, you just don’t seem to get basic concepts of human nature, and apparently recent history.”
Ok. What are these basic concepts of human nature of which I’m oblivious?
“Greed, while perhaps the reason to try to aquire more stuff, must be regulated and regulated by an authority with the power to stop greed.”
Ah. After you’ve outlined the “basic concepts of human nature,” perhaps you could explain why you wish to stop people from “acquiring more stuff,” and who might possess the (legitimate) “authority” to stop them from doing so. As far as I can tell, neither you nor anyone else possesses any authority to prevent anyone from acquiring more stuff, unless he is taking it from you.
“Freddie and Fannie don’t originate loans, duh - they just buy them so lenders can continue the same greedy process all over again.”
Yes. That creates a secondary market, which allows lenders to originate crappy loans with no risk to themselves. They then pass those risks along to taxpayers via Fannie and Freddie, at the latter’s solicitation.
“I don’t need to read the book you are suggesting, because I know what caused the problem.”
Yes you do, and no, you don’t.
AnalyzeThat on September 08 at 7:33 p.m.
The federal government suing a bunch of banks for making bad loans which they authorized and were not monitored by regulatory agencies is a huge waste of taxpayer dollars.
The HAMP program has failed because it is too restrictive per Freddie and Fannie guidelines. The Feds need to loosen those guidelines so the banks,along with Freddie and Fannie, can just their delinquent loans modified quickly. Then modify them to something the customers can afford, just to get their problem loan portfolio on an even keel.
johnclarke on September 09 at 10:12 a.m.
*sigh* ok, mighty gmorton knows all. Except for one problem, you really don’t. Your answer for every problem is “gubmint” and really when we see gubmint’s regulatory powers scaled back, the problems soon follow. You are like a member of some odd religious sect that blames each and every problem on gubmint, and it’s really just an excuse for the entire right. The right fails (actually they succeed from the rich 1% perspective) over and over, the people get fleeced and you collect your social security and medicare.