What should be done about the mortgage crisis?

More houses are being foreclosed, more families are receiving foreclosure notices, and houses values are depreciating. Unfortunately, house values have not dropped far enough in most markets so teacher, policemen, and paramedics can afford to buy one.

Obama and Clinton have talked about a $30 billion aid to homeowners. McCain has promised not aid to bailout anyone. However, McCain supported deregulation of the banking industry that is partially responsible for all of the loans that lacked collateral and allowed subprime loans with ARMS and balloon payments. These ARMS and balloon payments led to much of the payment delinquency.

Which candidate is right? What should be done?

1. Should we bailout everyone who made a bad investment, bankers and homeowners alike.

2. Should we only bailout the bankers?

3. Should we bailout only the homeowners?

4. Should we bailout only homeowners? How will we decide who gets help?

5. Should we bailout no one? “You made your bed, not sleep in it.

Tex Shelters
Read my blog about the crisis at myspace.com/texshelters

we help the home owners as best we can and take the banking executives to Gitmo to enjoy the water sports.

You know, like in the real world where risk sometimes results in loss.

about a year ago and when the dust settled they realized that they had paid too much for a home that needed too much work. The only bad thing is that they now have a very bad credit rating because of a lying real estate dealer and a predatory banker. If there is help it should be a second chance on the credit rating - not a free ride - but at least consideration of what really happened. They pay all their other bills regularly and their rent is what they should have been held to for house payments. Whoever thought they could pay more for a mortgage was crazy.

That's the thing. Yes, those who bought more house than they could afford should not be bailed out. Banks that were reckless should pay a price. Investors who did not manage risk should suffer the consequences. However, when the financial system is on the verge of freezing up, intervention is necessary.

But, they're greedy.

If they were more aggressive with their Default Resolution depts, they could keep a lot of these loans performing. The lenders/servicers also need to INSTRUCT their foreclosure attorneys to earmark every loan that looks like a good candidate for default resolution, detail it, and give them that feedback. These lenders should know before the suit is filed that this might be a good loan to try to salvage. Run the title, send the lender an O&E, then file the Lis Pendens. In judicial states, this would be huge.

card debts.

renegotiate with the borrower for fixed rate mortgages that they can afford. If this is not possible, they should be given a couple months to find an apartment. I also think there should be new regulations that don't allow for interest only loans or these absurd adjustable rate mortgages that go up 20% if you are late with a payment.

CEOs & execs of failing lenders should have to forfeit a big chunk of their compensation because of their incompetence.

Then we need immediat changes to the laws that give tax breaks to companies that offshore.

Then raise the minimum wage significantly.

Then we will have more affordable housing, and better wages so that mor people will be able to afford it.




The one thing we should NOT do is try to prop up artificially high house prices. For most of the last century, the average home cost about 3X local median income. In the last 8 years, that soared to 5 to 10 times median income depending on the region, thanks to speculators and crazy loans. We need to let house prices fall back to historical trends, not subsidize poorer people into buying at ridiculously inflated prices.

The effects on the financial system will be bad whatever we do, but propping up this housing bubble for another couple of years will only prolong and worsen the pain.

People couldn't afford the houses they were moving into get loans. Banks thought the prices would go up and these lenders were just going to sell the loans anyways. Some people lost their homes because of illness (no health care) or layoffs.

Subprime lenders targeted people who were financially vulnerable who have lost their homes now.

Certainly, a more educated populace wouldn't have taken on these loans. Some lenders, however, did prey on their ignore to make money through refinance fees and higher interest rates. Some cases of lending, while legal, are akin to theft. I do feel that some cases of the elderly losing their family home, single parents, and a few others should receive some help. Loan forgiveness after houses get foreclosed would work for me. That way the lender who made these unsecured loans would have to deal with some of the consequences.

Thanks for the great posts! I would recommend them if I could.

Tex Shelters

...but that doesn't change the fact that these people were not qualified to buy the homes they were in and cannot make the payments. Maybe they should file a class action lawsuit against the people who came up with these gimmicks for damages to their credit record. Perhaps the government can arrange to give a credit record "amnesty" to the people who were roped in.

But letting them keep their houses or reducing the principle, etc. is EXTREMELY unfair to all the people who saved up downpayments and made their loan payments on time.

They should be foreclosed if they can't pay. Whatever injustice was done them should be compensated some way OTHER than propping up the bubble prices.

No continued debt, no home, no credit problem. I money is still owed, let the vultures pay.

Now, if there is no cause of action, you liable for the whole loan. We shouldn't, however, let people be homeless because of this. I'm not sure what to do about homelessness. That's for another post.

Tex Shelters

Under those laws, borrowers do not have to repay amounts remaining on the first mortgage on certain (but not all) properties in the case of foreclosure. The lender gets the property, and the homeowner walks away. Mind you, that is only true of certain properties. The banks in California will be stuck with many, but not all, of these properties.

Unfortunately, if I recall correctly, those who owe on second mortgages will have to pay off the second mortgages as well as any additional mortgages. Sadly, it will be those homeowners who had enough equity to take second mortgages and who still owe on their first mortgage who will be hurt the worst here in California.

All situations are different. California homeowners who face foreclosure should not rely on what I am saying here. If you can't pay your mortgage you should see a lawyer and get advice that fits your particular situation right away. It may be possible to get help before it is too late. Anti-deficiency laws in California might make some lenders very reasonable about negotiating new terms on your mortgage. See a lawyer.

The difference is automatically taxed as income. So, you lose your house, don't own the bank money, but if the bank reports the difference to the IRS, you'll have to pay a big chunk of that in taxes.

Then again, stranger things have happened...



On a side note; with this mortgage mess and banks being very tight with money I can't believe I am still seeing new development of overinflated McMansions... One bedroom condos starting at 200K? Who are they thinking will be able to afford these things in the next few years?

and mortgage lenders and, if given, to the homeowners in foreclosure will be rapid inflation. The Fed is printing all kinds of money. In my view, Bush's suggestion that the Fed be given government regulatory control is insane. The Fed has made enough mistakes already. The responsibility for determining the parameters of the regulations belongs to the Congress. If anything, I think the judiciary should be given a greater role in enforcing regulations against lenders. And consumers should be granted more protection and more recourse in the case of excesses by lenders. More of the risk, not less, for making bad loans should be placed on lenders.

within markets and work them out through the government. They won't be bailed out as such, but we can relieve the pressure. The government can buy them at a discount from the banks so the banks will take losses, but be happy to get them off their books at the same time. I'm not interested in bailing out those who bought more house than they could afford. You don't have a right to a large house.

This should be coupled with new regulations on lending and huge constraints on investment banks and hedge funds that provided the financing for this nonsense through the mortgage securities market.

Some people are going to lose homes that they never should have bought in the first place. People who leveraged their inflated equity for frivilous purposes should have known better. Some financial institutions are going to fail and rightfully so.

Next, implement some regulatory controls to reduce the kind of predatory lending that has contributed to the mess. "Zero documentation" loans should never have been allowed. Underwriting standards should be regulated.

Finally, implement national standards for financial education in public schools. Kids should not be set loose into the real world without a basic understanding of how to run a family budget and plan for the future.

All I would add is that we punish a few of the fat cats in this and I think you do have the answers.

No one should sign for a variable rate mortgage if they do not fully understand what the term means.

re-regulate the crap out of the financial system, including abolition of the federal reserve. It may be necessary to at least temporarily nationalize the mortgage industry.

establish a baseline interest rate and rework every mortgage in America accordingly, for any mortgagee who wants to, whether the borrower is in default or not.

If the homeowner still can't make payments, they need to sell the house and move to someplace they can afford or declare bankruptcy.

Once the situation is stabilized, evaluate whether or not to re-privatize the mortgage industry, make nationalization permanent or perhaps nationalize the entire financial system.

the capitalists have proven themselves incapable of managing their own affairs and incapable of behaving like civilized people.


unless we address the abysmal employment, median income and privatized medical industry problems concurrently, anything we do about mortgages will just be a band aid.

Re-regulating the banking industry must be done, or we will have savings-in-loan crisis II, or some other banking scandal where the American public pays and the bankers and large stock holder get the bailouts.

There's a good article about deregulation and some the history at commondreams.org

http://www.commondreams.org/archive/2008/03/29/7960/

Tex Shelters

Should I be punished for not allowing my wish to own my own home blind me into signing a mortgage I am not ready for yet? I can't even buy my own home even though I have one of the best paying blue collar jobs in the country. Should I have it made even more difficult for myself so that others who used poor judgment (BOTH the lenders and buyers) can have their cake and eat it too -- at my expense? Where's my cake?

Bailing these people out is unfairly passing the problem they created onto me with them benefiting from me helping them buy their house while I, who didn't allow greed to blind me, get nothing but more difficulty in saving up enough money to buy myself a home.

Is that fair?

:shrug:

but I've heard stories about retired people who were convinced into refinancing and they lost their family home of decades. I would be willing to help them. I have no sympathy for the lenders and mortgage firms. Let them sink and let's start again. The home owners to bought above their means: they get my sympathy, but lesson learned, eh?

Tex Shelters

But there's no way I am going to pay for someone else's home when I don't have my own home. It is absolutely not fair to make me help someone buy their home and as a result making it even more difficult me for to buy my own home.

The ONLY way that could ever be fair is: After all the bailed out home owners are no longer about to lose their homes, they cash out some of their equity to help me buy a home. Now that is no more absurd then my having to help them with their mortgages.

Anyway, that's my point of view...



Peace..

:hi:

How are people hurt who work hard, but, have no home ownership because those who have, have through taking from those who don't have? If you can't see the injury in that then let me ask you this.

How would it hurt home owners to cash out some of their equity to help me buy a house? Its an equally fair question to your own.

If home owners are not willing to equally contribute, then its not going to hurt them any more to rent like the rest of us who don't own homes do. Why should we give up our savings to rescue someone else's savings if they are not willing to contribute back?

afford a house?

I think there's probably another solution.

Even though I don't own my home that I should help other people buy theirs when they ain't going to help me buy one? And you think that's fair?

You must be one of the people who's wanting me to pay for your house but then not do a thing to help me buy one.

If you ain't willing to help me buy a house, then I for damn sure ain't going to make it more difficult for myself by helping you buy yours.

Do you think people need to be foreclosed on so that you can afford a home?

Don't you think there's another solution (which doesn't require taxpayers underwriting high home prices/bank profits from interest)?

I think prices can come down, mortgages can be reset, and you can afford a home without a lot of people having to be foreclosed on.

No matter what, we will either have massive inflation or the price of housing will go down quite a bit more. You will be in the best possible position because you have been careful with your money. Just continue to make wise decisions. In the end, you will be fine. You will be glad you waited to buy a house. No matter what happens, housing prices will go down in real dollar terms. They will go back up, but if you account for inflation, the actual prices will be more affordable. The inflated prices bore no relation to reality. They were way out of proportion to wages. They made no sense.

through Fannie Mae. Inflation is already eating us alive, so a few more percent of it isn't gonna matter much.

The biggest problem right now is that the banks are hoarding the cash. Use Fannie Mae to get around them.

a moratorium on home foreclosures, but the more I thought about that, the more I thought the consequences (unintended consequences) could be very bad for many people.

This is really a bad situation. I guess my most honest answer is that things have to be shaken out, even if it is painful as hell. Otherwise, the bubble just moves around the globe, from industry to industry and sector to sector.

All of us are to blame, and we have to suffer. The longer we postpone our suffering, the worse it will be.

So, I don't want to see "solutions" which pour money in to inflate prices, or that shift the risk off banks and buyers and on to taxpayers.

Average home prices in the US are still above $200,000, but the average wage is stagnant around $30-35,000. That's six times the average income. A person should really not take out a mortgage that's more than 3 times their annual income to be on the safe side. That leaves many people still shut out of the housing market. Home prices need to drop at least 50% in most areas of the country, and even more than that on the coasts.

which makes the reasonable average home price, according to your calculation, 180k to 210k.

The core problem with the mortgage industry was a pattern of fraud that started with borrowers and included everyone up the chain, including the loan originators, banks, MBS securitizers and the Federal Reserve.

Many borrowers simply lied flat-out. That's why Alt-A loans are typically referred to as "liar loans".

Many loan originators also lied. They put in the numbers into the system that they knew would be approved, regardless of whether they were true or not. The originators got paid based on loans granted and paid no penalty for bad loans, even if they immediately went belly-up.

The banks who originated the loans also bear responsibility. They approved of a practice of issuing loans to people who were very unlikely to be able to meet the terms. In particular, most people had no business getting adjustable rate loans - and the banks knew well that after these loans adjusted, a good many borrowers would be forced into default, then foreclosure. Even worse was the practice of selling option-ARMS (a speculator's tool) to Joe Average, knowing full well that the buyer had no idea what he was getting into. You need a good deal more economic education than your typical homebuyer to understand those products. And the worst of all was the interest-only loan. If any of those actually get paid off, I will be quite surprised.

Then come the MBS manufacturers. They packaged these garbage loans into securities and camoflauged the credit risk by applying their own credit ratings to them. These were then sold to unwitting investors who believed the risk levels presented to them, which were wildly different from the risk levels of the underlying loans.

Finally, the Fed and the policymakers who enabled all this, by requiring banks to make loans to bad risks, and keeping interest rates artificially low to pump up the valuation bubble.