My New Blog

The cause of much of our economic mess has been the mortgage crisis.  If lenders had done what they should have done, if borrowers would have been more suspicious and conservative, and if the regulators would have been on the ball we would not be in the mess we are in.

Now we have people in government trying to figure out a way to get out of this mess.  Many people believe that we need to deal with the root cause of it all which is the mortgage mess and the decline in housing values.  Thus there is the impetus to try to prevent foreclosures.  But as I have said that is easier said.  These companies that hold these mortgages have layers of beauracracy.   Some of this is because of the servicing companies that collect money for the mortgage, but do not actually own the mortgage.  It is really hard to actually find the person and talk to that person holding the mortgage. 

Below is a link to a web site that tells the story of six homeowners trying to get their mortgages reworked.  It illustrates the problem.  What's the solution?  Hard to know.  But this should give people pause that think because the government promotes something it will actually get done.  Be wary of political promises.

http://finance.yahoo.com/real-estate/article/106472/Tough-Workouts

What to do about housing?   If we help people to refinance that bought more house than they could afford will that help the slide in the real estate market?  The answer is mixed.  According to statistics about 53% of those that have their mortgages reworked still go into foreclosure.  The HOPE program touted by FHA has only helped 500 households.  They were suppose to help thousands.  The problem is far more complex then just filling out a bunch of paperwork.

First of all there is the problem of rewriting the mortgage in a market that has declined.  I recently did an appraisal on a property that was purchased in 2001 for about 111,000.  It isn't worth 80,000 today.  So how can that individual refinance?  He can't.  He's stuck.  Will the bank write down the loan 31,000.  I doubt it.  If they would get into that habit it would open up the floodgates to everyone that wanted to refinance.

Second of all we have people that can't afford the mortgage they have even if the rates are significantly reduced.  They bought more than they could afford in the first place because lending standards were too lax.  Lenders believed values would continue to go up, so they were willing to take a huge risk.  Well it didn't work.  Now these people are in houses they can't afford at any mortgage rate.  What's a lender to do?  If they foreclose they will loose thousands.  If they keep the people in the home they would have to loose thousands.  Do they take the hit now or later? 

Third we have people that got caught in mortgage schemes and were basically cheated by unscrupulous lenders.  How many of the mortgages out there are like that?  Hard to say.  If they can afford mortgages at reasonable rates then these people are worth helping.  But many of these people must realize that they may be paying a $100,000 mortgage on a house worth $80,000.  Some people are simply walking away.  They don't want to do that.   But apparently 47% have been helped.  It's probably worth it to stabilize values.  Something is better than nothing.

But we need to make something very clear.  If housing values are too high they need to come down to make housing more affordable for more people.  We should never artificially prop up housing values.  That is a ticking time bomb.