As the economic crisis really begins to come to a head, we are hearing of ideas to stem off the housing credit problems. Let me begin by saying that I would be livid if some home loans are “forgiven” of the difference between their purchase price and current value. I would be even more livid if only those “in trouble” are bailed out of their mortgages, whether it is due to their poor decision-making, predator lending or as a result of the current economic climate. Most of the sub-prime borrowers assumed their homes would retain their value, so why should they be given a pass on the loss?
Even worse, if the government bails the problem loans out by paying down the difference between the payoff of the original mortgage and the present worth of the home, how does that protect the homeowner? This creates a better opportunity for the banks to then take possession of the home knowing that they can now resell it and not be upside down. Don’t think for a minute that the banks are going to let a borrower gone bad have the opportunity to go bad again.
My true reasons for being upset are simple. I will have to pay for the misfortune or the stupidity of others. I had to accept a sub-prime mortgage due to a bout with unemployment several years before I bought my house. However, I chose to move out of a state where house values were clearly over-the-top and bought a house in Texas that I could afford, even with a sub-prime mortgage. These two conscious decisions allow me to actually MAKE my mortgage payments like the vast majority of sub-prime borrowers while my home has retained its original value.
I don’t see why the responsible people like me should be forced to bear the burden of those that failed. I have yet to hear of a bail-out for people like me, who have chugged away, faithfully paying high-interest while waiting for the credit score to inch its way upward to provide an ability to refinance at A-paper rates. Now that I have A-paper credit, I still can’t find a lender willing to underwrite a refinance since I am now self-employed. Further, why should those people that have managed their credit wisely and have had the fortune of being A-paper borrowers also be punished?
Here is my suggestion for a “rescue” of the housing market: First, reform the credit reporting agencies. The megalopoly that controls the ability to obtain credit is far too powerful and credit scores do not allow for reasonable explanations of negative items and it is far too difficult to repair. Lenders that do manual common-sense underwriting have gone the way of the dinosaur.
Second, instead of lowering a homeowner’s borrowed amount to resemble their current home value, I suggest a 3 phase approach to ALL loans. Phase 1; give all troubled borrowers a 3-month mortgage holiday. During these 3 months they can use their mortgage payment dollars to pay down other high interest overly-burdensome debt or sell their home. Phase 2; re-age the loans to account for the mortgage holiday. Phase 3, all borrowers can choose to re-cast their mortgage at a 30-year fixed rate for prime + 2% or some other reasonable margin. And finally, credit card companies should have stricter guidelines for maximum interest-rates as well as their penalties associated with them.
This will stem off a large majority of home foreclosures, stabilize the banking lenders who would benefit from the new revenue stream instead of having to foreclose on houses that are worth less than they lent on them, reward good stewards of their bad mortgages and NOT negatively impact those folks that have traditional A-paper loans.
The impetus for any rescue should be to give the people an opportunity to make good on their debt. Any assistance should be to that end.