You read it here first. The DC housing market will pop and it is going to be a dramatic event. - FFI - 20 August 2005 (Note: Surely, there were other 'first' voices.)
The talk of an outright bailout seems to have diminished. Instead, now the plan is to legislate changes to the holders of some of these subprime loans. And by change, I mean freeze the adjustable rate of the loan.
I have problems with the Government stepping in to protect...actually I am not sure who they are trying to protect. On the surface, you would think they are acting to protect the homeowners, but is it fair to force them to stay in a house they can't afford, and most likely won't be able to afford their mortgage payments once the freeze expires, if they can continue making their payments that long.
"It's a big misconception to think that (mortgage) resets are responsible for the delinquencies," Laperriere said.
Of the subprime loans made in 2006 and scheduled to reset in 2008, some 25 percent are already delinquent, he said.
"What's driving the delinquencies is that people can't afford the initial payments," Laperriere said.
That's a problem Paulson's plan won't fix. - Bloomberg (Found at Housing Bubble Blog)
- Eliminating the prepayment penalty,
- Extending the interest-only period of the loan and then giving a full 30 years to pay off the principal once the loan rests to a (rate-frozen) adjustable rate loan
- Turning the loan into a fixed-rate loan
- Permitting more and more generous short sales.
Many of these loans have already being sold at deeply discounted prices, so the new loan-holders have a good deal of margin to cut the home owners a break and still make a profit.
Another possibility for the banks, given that the 'professionals' seem to have the opinion that this is just an 'anomaly', is to offer home loans in excess of the current value of these homes. In other words permit mortgages with a total value in excess of the current market value of the home. After all, if the value of the home is going to continue rising over time, as they claim, then why not put them into a better loan with a lower payment, that after a short time, a combination of appreciation and (hopefully) mortgage payments will have the value of the loan at a point less than the value of the home.
Of course, if the houses aren't actually worth what they were when they were sold and now your 'homeowners' are walking away from their obligations, they can always partly write off some of the principal of the loan. It would be kind of like agreeing to a short sale, without selling the property. This has an additional benefit of not requiring a buyer since almost nobody is interested in buying a house at the moment. So they might as well do whatever possible to keep those already in the houses, in them and paying off their mortgages.
So, there is no shortage of creative solutions to this mess of their own creation as you can see from my suggestions above. Surely, Wall Street, the mortgage industry and the banks can come up with something even more creative. And best of all, it won't involve the Government.
However, I don't think anyone should rush in to save those in trouble. Many of these people are doomed to be foreclosed on regardless of what you do for them; Write-off the loan and give them a clean title? Great, now they can extract more equity out of the house with a new mortgage or home equity loan. Hell, Senator Clinton is calling for a three-month halt to foreclosures. That's a great Christmas present; Three months-rent free, and at the end of that time period, they still have to get around to evicting you. Of course, the list of those to be evicted would have grown greatly during that time. This kind of action will help nobody except perhaps win a couple of votes for Senator Clinton. This example also points out a big problem in all of this, in that many people who are having problems right now, are not doing much about it. They are not getting rid of their luxury cars. They don't seem to be doing much of anything other than abandoning their mortgage payments. Many are abandoning them well before the interest rate resets that they are talking about freezing. Also, many are investors and other who have loans other than the type that will be covered, so if something is to be done, it will probably have to be an industry-wide solution, as the Government one is going to be limited, if anything at all:
The plan would also seemingly exclude borrowers who hold option-ARMs that aren't subprime. These are loans that start with extremely low "teaser" rates before rising dramatically a few years into the loan.
It has also been reported that homes that were bought as investments - as opposed to for the purpose of living in - would be excluded.
More than 50% of the increase in delinquent mortgages are actually investor-related, said Wachovia senior economist Mark Vitner. "It's hard to conceive how many people are actually going to meet this criteria. There's nothing at all in there that addresses investors," said Vitner, who added he doesn't support an investor bailout. - CNN
Another odd thing about all these people abandoning their homes, is that many of these 'homeowners' are going from a position of little cash to having lots of cash as they are no longer paying their mortgage nor are they paying rent. So while the housing market might be screwed along with the businesses that support it, could it be that the general economy will keep chugging on like before with whatever loss due to the housing downturn compensated by increased foreign input, such as increased exports, due to the increased buying power of other currencies.
Imagine if the Government rushed and acted to limit rising house prices.
More thoughts at the following Blogs, both of which provide no shortage of examples of homeowners in trouble who have nobody to blame but themselves:
More Financial Malpractice from the Union Tribune - Bubble Markets Inventory Tracking
Politicians and Bush say ‘F-you’ to RESPONSIBLE Americans and extend the housing bubble 5 more years (at least) - Housing Bubble Casualty