Friday, December 07, 2007

Mortgage 'freeze' buys time for some

Many wait too long for adjustable rate help
Staff Writer
The Tennessean
Published: Thursday, 12/06/07

A mortgage freeze to be unveiled by President Bush today may provide only limited relief to thousands of financially strapped homeowners, and may not be enough to cure the foreclosure crisis, advisers who work with troubled borrowers in Middle Tennessee said.

The Bush administration's plan, which would freeze the interest rates on many adjustable-rate mortgages at their lower introductory levels, excludes many who need help the most, including those in foreclosure and those already behind on adjustable-rate monthly payments, officials from several Nashville-area housing organizations said.

The plan, which has the support of major banks, relies on borrowers and lenders to come together to revise terms of loans before adjustable loans accelerate — sometimes to double-digit rates.

Many first-time Middle Tennessee homebuyers in danger of foreclosure don't realize how bad their situations are until they are too far behind on payments, loan counselors said. "They're trying to figure this out themselves … and when (a solution) doesn't occur, that's when they come forward," said Rosalind Robinson, president and founder of Residential Resources Inc., an east Nashville housing counselor. "For this to work, they're going to need to set aside those emotions."

Delaying higher adjustable-rate payments won't always solve the underlying cause — a propensity of homeowners to buy a home they cannot afford, some advisers said. "The mistake that they made is they were able to buy a $120,000 house, but they fell in love with a $180,000 house," said Rod Williams, director of housing services for Woodbine Community Organization, which offers financial counseling. (To read all: Mortgage 'freeze')

My Commentary
This recent announcement of a mortgage rate freeze is a positive development but will probably help few people. What we know about it at this time is that people must apply for the mortgage rate freeze before their adjustable rate mortgage resets and they must not have been late on any house payments. If they qualify, they may have their introductory rate frozen for up to five years. Unless there is a big advertising campaign most people won't even know of the program until after their mortgage resets and they have trouble making their higher house payment. This program will help only a few people, just as will the recently announced FHA Secure program.

I do not advocate a general bail out of homeowners or mortgage companies. The people who took out bad loans and the mortgage companies that made bad loans should surfer the consequences. Small steps to slow the defaults are all we should be doing. For the people who got in a house with no money down and got a teaser rate, if they lose their home, while it is emotionally devastating, in reality they are not really losing anything since they have no equity in the house. For two years they got to live in a house they could not afford. We should not feel too sorry for them. While we need to try to mitigate the effect of the mortgage crisis, we should not reward bad decisions.

However, we should not just ignore this mortgage default crisis either. It could affect the general economy. Also, even if your home is not at risk, you can be harmed by this foreclosure problem. If three houses are foreclosed on your street, the property values could drop. If the houses set empty and get vandalized, prices can drop more. For some people who were going to downsize when they retired and a lot of their wealth was in their home, they will find they are less wealthy than they thought. Also, if a lot of home prices drop, local government will reap less tax revenue from property taxes. There is a public purpose in slowing the rate of default.

A response to the crisis that would help more than anything is additional funding of housing counseling. People do not know their options, and they do not know how to present their case to the mortgage company. Unfortunately, the people at the mortgage company are often uninformed about their own options. When it is a win/win and the mortgage company can me made to understand this, many times the home can be saved or at least foreclosure avoided. About 90% of the people I counsel avoid foreclosure. To avoid the foreclosure however, someone has to know what is doable and how to propose it.

Another thing that would help mitigate the mortgage default crisis is a rescue lending pool. As part of a comprehensive loan modification or forbearance plan, the pool could loan the homeowner additional funds to bring the payment current or to make a couple house payments. Sometimes if a homeowner can be helped with only a couple house payments they could save the home. The pool should be very limited however, and funded by the lending industry. If structured correctly, this could be a plus for all concerned. Stopping a foreclosure is not only helpful to the homeowner, but the lender as well. Government leadership could establish the mechanism to establish the rescue lending pool and convince the industry that this was in the industry’s best interest. The funding pool should be used sparingly and only when part of a plan that will avoid a foreclosure. We have to accept that some of the defaults should occur, but those that can be saved by a three hour counseling session or an infusion of a small loan should be saved.

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