Plan to Freeze Subprime Mortgage Rates

This Thursday, Treasury Secretary Paulson and President Bush announced the details of a plan to freeze the interest rates on many subprime ARMs (Adjustable Rate Mortgages). While this spurred the stock markets and initially the idea sounds good, it's like putting a band-aide on a gunshot wound.

Many of the subprime loans that were closed during the mortgage and real estate boom were "stated income" loans. These loans don't require much, if any, verification of income and are often called "liar loans" within the lending industry. Unfortunately, the outcome of many of these loans will be the fact that borrowers are unable to pay the needed mortgage payments and will end up in foreclosure.

The current year has seen drastic increases in foreclosures across the nation with the south and mid-west leading the pack. The Mortgage Bankers Associations National Delinquency Survey for the 3rd Quarter of this year places the US average default rate at 19.6% (mortgage payments past due at least 1 month). Indiana is towards the top of the list at 22.3%, but the states in serious trouble are: Mississippi (30.2%), West Virginia (27.5%), Michigan (26.2%), Missouri (25.7%), Tennessee (25.3%), and Alabama (25.1%). When the plan to freeze ARM rates is really evaluated, most experts agree that it will only help between 10-20% of the ARM borrowers facing serious problems. Combine lost projected income for mortgage investors, the increased amount of vacant homes, and the added foreclosures to the existing housing inventory, I believe the housing slump will extend well past the end of 2008; which is when many industry leaders state the upturn will begin.

I'm not going to sugar coat things. I see the current market as a strong buyers market. Several options to choose from and heavy listing competition put the negotiation power in the hands of the buyer with one big exception: Many sellers CAN'T reduce the amount they are requesting, due to the amount owed on the property. The refinance boom has effectively made the real estate market stagnant with no money down mortgages and home equity loans (2nd mortgages). Add in depreciation and many current homeowners have little to no equity in their home, or even worse, owe more than the property is worth. I speak with other Realtors on a regular basis and it is well know that we are in a bad market with no sign of change in the near future. I read a recent news article that talked about avoiding a recession, but then later in the article it was implied that we are already in a recession. Call it what you want- the overall current US economy is not good and several signs point that this is just the beginning.

I don't have a answer our current problems, mainly because I don't have the authority to make the necessary changes. All I can do is try and educate people and identify some of the causes to these issues in hopes that I can help some people avoid costly mistakes. The best solution I can suggest is to begin teaching real life (practical) skills in our educational systems (and not just in colleges). Many people will say that learning about getting a mortgage, property ownership, obtaining insurance (car, life, auto, liability, etc.), managing a budget, paying taxes, and stocks (trading, options, IPO's) should be taught in the home, but I disagree. My parents knew little about these matters and I have had significant obstacles to overcome to obtained my desired level of education on these matters. Mistakes in many of these arenas can have drastic and life-long effects for the average individual. The best way to avoid the problems we currently face is through education.