OK... We all know how the mortgage crisis came about. Banks knowlingly lent money to high-risk borrowers with little to no equity in their homes. Properties were over valued by complicit apprasiers, as were the resulting securities sold by the banks to get those loans the hell of their books and into someone else's hands. But the way we've gone about dealing with the resulting foreclosure crisis leaves much to be desired.
Now... A lttlie background. I've got a 15 year balloon mortgage at 6.125%. That was an OK deal at the time (we were coming of a 5-year balloon about a year before all the shit really hit the fan, so we were actually pretty lucky timing-wise!) Right now rates on a 30-year fixed are about 4.1 to 4.5%. So I could save about $200 a month or so if I could refy. Now, I've never missed a payment, and can comfortably continue to pay I'm doing now. I also have excellent credit. So on a personal level I'm a very low risk borrower. But like many people I'm underwater. So while I could pay back the loan, obviously with even less risk that I represent at my current, higher rate, the bank won't even talk to me.
Which is bullshit.
Now... if I were 90 days BEHIND on my mortgage? Then the gov't would (try to) force them to deal with me. How's that for a backwards incentive? What's more, the banks are so well protected by this loop hole that it's still far more likely that I'd be forced into forclosure than get the loan modification. So while I'm not one of those guys saying "Where's MY bailout?" - I recognize that I AM benefiting from my neighbor being bailed out - I AM getting frustrated at a system that rewards, indeed encorages, every kind of bad behavior - borrowing too much, high risk lending, NOT PAYING YOUR BILLS - and punnishes me for (1) acting responsibly and (2) for market forces which are completely outside of my control. And I'm not even looking for a reduction of PRINCIPAL - that's just BULLSHIT, and I'll get to that in a moment - I just want to take advatgae of the lower market interests rates. But I can't... BECAUSE OF THE MARKET!
Now, one of the big problems with the old system was the inherent conflict of interest involved in having the mortgage brokers hire (and pay) the appraisers. It USED to be that they could just make a phone call, and get an apraisal. That may have been problematic in some markets, but get this: NOW, not only do I pay for appraisal - $300-$500, whether or not I end up getting the loan - but if the rate falls again after I get the appraisal, I can’t get that better rate with the same bank that the appraisal was done for, and I can’t transfer that appraisal to new bank! So I'd have to shell out AGAIN! Why is that? Govenrment regulations, I'm told. Nice going, morans!
Now, I think there was a much simpler way to stem the bleeding here. And, as usual with MY proposals, and as is so often NOT the case with Gov't, it puts the responsible CUSTOMER first. There is a wide perception that a lot of these people "just borrowed too much." To be sure, that's true of some, but by and large, the bigger problem was that so many people were faced with unforseen rate changes or ballons that expired (meaning that the now owe the entire balance) that they would notrmally just have re-finance at the new market rates, but CAN'T because there's no equity, or they're underwater, so the bank won't approve the new loan. So they lose the house, despite the fact that they could have made payments at the current, 30 year fixed, market interest rate. And their foreclosure hurts the market and puts that many more people under water and it's a viscious cycle. So THOSE are the people who I'd help first. And I'd do it thusly: For a predefined, finite amount of time - say, two years - anyone who had made their last [6?, 12? some number] mortgage payments on time, and can continue to do so, based on thier current income, AUTOMATICALLY QUALIFIES for a re-fi, at their current principle, plus closing costs, at the current market interest rate. That alone would have made this "crisis" basically manageble. And no one gets "punnished." Banks continue to do business with their best customers, stabalizing their own income and the value of their assets, while the GOOD customers benefit from the favorable market conditions and get to keep their house. (And obviously this would not extend to anyone buying a new house or a second home, etc... Just thier primary residence.)
Now... if someone TRULY borrowed too much? And there's just no way they can afford the 30-year fixed market rate? (Or even a slightly lower rate?) I'm inclined to say, "Sucks to be you." If you lose your job and you're unemployed for a few years? Guess what? It's likely that ANYONE would have to sell / foreclose / go into bankrupcy. For better or worse, THAT'S HOW THINGS WORK IN THIS COUNTRY. By reducing the PRINCIPLE of the loan, you're giving free money to the least deserving customers. OK - I'm alright with punninshing the banks a little (and helping out the borrower) if the bank was truly predatory. BUT... most of these loans were "predatory" becuase of the future interest-rate hikes! So what's wrong with simply forcing the conversion to a 30-year fixed (or longer maybe? Why NOT a 40 or 50 year? They have 100 year loans in europe!) at market rates if the person can afford that, and saying "sorry, but we can't help you" to the people who CAN'T? Seems to me that if they had done JUST THIS, at least at first, the economic fallout would not have snowballed as much as it did, and much of the resulting economic and fiscal fallout would have been mitigated. And the Banks would be discoraged from pursuing these kind of bullshit loans in the furture! See? Everybody wins, except the people who just went crazy wth their debt. (And for them, there's bankrupcy.)
And even if you agree with the IDEA of "helping people out" by lowering their principle? It ain't happening anyway. The program's a MESS. It really hasn't done what it's set put to do. Too many loopgoles for the Bank, and it's WAAAY to complicated. And that's not a Liberal/Conservative issue or a Democratic/Republican issue. The issue is that BANKS have too much influence, and LAWMAKERS never try the simple solution. Again - that not Lib/Con or PUb/Dem either: it's because almost EVERYONE OF THESE BASTARDS on BOTH SIDES of the ailse is a friggin' LAWYER. And making the law simple would but lawyers out of business.
My rant for the day.