Pardon me, but can you spot me a trillion or two?
Far from being the white knight riding in to rescue suffering homeowners, the much touted mortgage bailout is going to have disastrous consequences.
Taken simply at face value, the bail out sounds like a rational response to help millions of homeowners who were tricked by unscrupulous lenders. While it's true many lenders were looking out for their own interests, many of the homeowners facing foreclosure today knew exactly what they were getting into.
When buyers sign on the proverbial dotted line at closing, they are signing a legally binding contract obligating them to repay the loan. The majority of the borrowers now in trouble are folks who could not afford the homes they were buying in the first place. Lax lending guidelines allowed borrowers to simply state their income; many greatly exaggerated their income and financial liabilities. Risky, expensive loan terms were accepted because, for whatever reason, the borrowers thought the real estate gravy train would never end.
Under the terms of the bail out plan, interest rates and monthly payments would be frozen at current levels for five years. The caveat to this offer is that multiple conditions must be met first. 1) Borrowers must be current on their loan 2) The interest rate can not have reset yet and 3) The lender must determine that the borrower lacks the ability to make the higher payment. When all is said and done, estimates show the bail out will only help 10% - 12% of sub-prime borrowers; a paltry 240,000 out of 2.1 Million already in trouble.
What no one is really talking about is that bailing out borrowers really means bailing out their mortgage lenders. If borrowers can't repay the loan, the lenders foreclose. Foreclosures affect a lenders bottom line in a big way. By not making every citizen in the US pay for the bailout, lenders will be forced to step up to the plate and take action, if only in the interest of self preservation. It won't be a selfless act by any means; they will simply be protecting their bottom line. In this way, the market will correct itself.
The other side of the bail out plan not being discussed is that mortgages are backed by mortgage backed securities. Freezing rates will completely erode investor confidence in those securities, the side effect of which will be a shrinking of available mortgage funds. When that happens, even the most credit worthy borrower will have difficulty finding financing. If you think inventory is high and sales are low now, cut the pool of mortgage funds by 30% - 40% or more and see what happens.
The solution? Let the folks who got themselves into this mess get themselves out of it. If the American public refuses to be the safety net for irresponsible borrowers and risky for-profit lending, the borrowers and lenders will have to find a way to work together. If they don't, they will both cease to exist and we, as a nation, will be better off.
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Very well written post. Has the mortgage crisis impacted values in Alaska? You are right, the bankers are holding on tighter to their purse strings. Appraisals are dropping about 25% and this is causing it to take longer to get to the closing table.