Sunday, March 9, 2008

New Term - Great American Mortgage Crisis

Just came across a new term - The Great American Mortgage Crisis. I personally prefer the Great Housing Bubble - I guess we can see which one will catch on.

So this is the story I found it in - Many Ideas, But few are helping fix mortgages. It a good read that puts the housing market issues in general terms for even for those people whose eyes glaze over when you say "negative amortization" and act like you are speaking another language. That is probably partly why we are in this mess. So many people do not want to know or understand the details they are getting into - "just let me sign the papers and get my money" is complex enough for them. How many of these people thought they were financial wizards... I have met many.

So here is some good points from the article -

Interest rate cut....But to make the cut, the Fed will pump more money into the economy, which devalues the dollar and boosts inflation. That can drive down the long-term bond market, raising the rate on 30-year mortgages.

“The last two times the Fed dramatically reduced the fed funds rate, (long-term) mortgage rates went in opposite directions. It's been terrible,” said Mark Goldman, mortgage consultant with Windsor Capital Mortgage Corp.

Cutting the principal....Bernanke is asking lenders to rewrite their loans even though most loans are out of their hands. Instead, they have been packaged and resold to investors around the globe.

...Consider the implications. More than 10 percent of homeowners have mortgages that exceed their home's value. Some analysts say that number could top 30 percent this year. Does Bernanke expect lenders to rewrite all those loans? If so, what will happen a year from now if property values decline further?

Cutting government loan limits. Last week, government-sponsored lenders lifted the caps on “conforming” loans to let more people take advantage of their relatively low rates. The upper limits on loans from Fannie Mae, Freddie Mac and the FHA were once $417,000. Now those limits are being boosted nationwide. In San Diego's case, the new cap amounts to $697,500.

But when Fannie Mae and Freddie Mac lifted the cap, they raised their fees and tightened lending restrictions, meaning fewer borrowers will qualify.

Back to the future. So far, the best ideas are proposals to revive two programs created by Franklin Roosevelt in the heart of the Great Depression.

...Rep. Barney Frank, D-Mass., is pushing to help the FHA refinance 1 million troubled homeowners, as long as lenders agree to reduce their principal. Although cuts in principal could be problematic, Frank's bill is only one indication of the renewed interest in the FHA.

In the meantime, Sen. Christopher Dodd, D-Conn., is pushing to re-create the Home Owners' Loan Corp., or HOLC, a New Deal agency that helped defaulted borrowers buy their homes out of foreclosure with low-interest, long-term loans. Dodd proposes putting $20 billion into a similar program that would be embedded within an existing government agency, such as the FHA.

If the past is any indicator, this money would not be wasted. Ninety percent of the HOLC's loans were repaid, making it one of those rare government agencies that turns a profit. The concept has drawn support from both the conservative American Enterprise Institute and the liberal Center for American Progress.

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