Real estate runs in cycles. It goes up, it goes down..... but over the long haul, it's always gone up. Now history is no gaurantee of future events but my point is this, if the typical down cycle takes 5-7 years to turn around, and the government decides to freeze interest rates for all those ARM's guess what will happen? You'll take a 5 year down cycle and turn it into a 10 year down cycle (assuming a 5 year freeze on rates). Does that sound good for the economy?
Don't get me wrong, I'm not heartless. I understand what it feels like to be in foreclosure. The stress, the imbarassment, the problems it creates with family, work and friends. There are a lot of people out there that need help, but there are also a lot of people that knew perfectly well what they were getting into. They didn't care! They wanted to keep up with the Jones and when they were told they could afford that mini-mansion, they asked where to sign.
And what about all those people that make there payments on time. Why should they suffer. They used great restraint not getting in over their head, keeping their payments affordable. What about them?
The current system is broken.... the mortgage lenders haven't seen rates this low. What happens when rates go up? With all these lower rate mortgages (5%-6.5%), refinance loans will be pratically non existant. What caused all these problems? The teaser rate adjustable interest only loans! Think about it, the banks have killed two birds with one stone. First, they get the initial loan, great, but then what? With rates so low, people aren't likely to refinance. But what if the banks could create a scenario in which the borrower will more than likely be forced to refi? That's exactly what they did with the adjustable rates mortgages with teaser rates. When the teaser rate expires and the loan re-adjusts, the borrower is faced with rates higher then the current market rate (and therefore higher payments). So its in the borrowers best interest to refinance into a fixed rate. The payment is higher then the initial teaser rate loan but lower then the new adjusted payment. So in theory, every teaser rate loan was almost gauranting a second loan (refi). The ony problem...... timing! Unfortunately with values increasing at such a fast pace, it was only a matter of time before the market peaked. So if you purchased in the booming market, by the time your teaser expired and you needed to refi, the market value of your home was probably less then when you bought it, therefore increasing the Loan To Value and making it difficult if not impossible to refinance.
To make matters worse, this was typically the best case scenario. What about all those buyers who couldn't afford the current market rates (conventional fixed rates)? The reality is, borrowers should have been qualified based on adjusted rates or fixed rates not the teaser rate. There is plenty of blame to go around, but what good does that do? We need to fix the problem yes, but lets leave the blame game to the Media!
First, lets get back to real underwriting..... manual underwriting! I'm all for using techonology to increase efficiency and streamlining the process. But much like appraising real estate, there are too many small details and nuances for software programs to be the final decision maker. Credit anylysis isn't an exact science, yes there are guidelines, but you need someone with experience making those final decisions. Fannie Mae & Freddie Mac have great systems, but they should be not be used for approving loans, just confirming an underwriters decision. They should be used as tools to help with the process. This should limit the number of defaulted loans going forward.
Next, we need to deal with the current glut of foreclosed loans. My opinion, those loans that aren't already in foreclosure, should be refinanced into a government sponsored FHA loan program allowing adjustable rate loans to be refinanced into low fixed rate loans. I recently read an article by a professor stating these loans should allow the borrower to refinance into loans with rates lower than the current market rate, in exchange the borrower cannot resell the property for a profit. Any appreciation would go back into the loan pool. I like this idea, becuase it doesn't bail the borrowers completely out. (Not fair for those who pay on time to pay market rate when lower rates are available to those who got themselves into this mess). The rest unfortunately need to let the process run its course. It will be hard, but needs to be done for the sake of the market. Bailing everyone out will only pro-long the agaony. Another idea is to re-write these loans to fixed rate loans (with higher rates-they're not A credit borrowers so they shouldn't get A credit rates). But extend the loan term out to 40 or 50 years to bring down the monthly payment. Put in a pre-payment penalty to keep them from refinancing in a year or two and getting a free ride. The pre-payment penalty will offset the lenders yield so everyone wins but no one gets off scott free. Just my opinion what's yours?
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