The Sub-Prime Mortgage Solution?

Posted on August 31, 2007 by Eric
Filed Under Mortgage

Now, if I can only find 6 roommates… President Bush spoke this morning about helping homeowners through the sub-prime mortgage situation by making it easier for some borrowers to refinance their failing sub-prime mortgage through the Federal Housing Administration (FHA) program, cutting down on predatory lending, and creating more transparency in the lending process.

As we’re currently in the process of having a new home built, this was welcome news. The recent sub-prime “crisis” actually did make me wonder about how many people would be buying homes, and if our homebuilder would be able to weather a downturn.

I do have some concerns about how this is going to affect the economy. I fully support helping out homeowners who were mislead into getting bad mortgages. If a lender mislead them into getting into something they could never have afforded without using some exotic loan mechanism and then not fully disclosing that, for instance, their loan payments would nearly double when their ARMs readjusted, then I believe those folks should get some help. Buying a home is no easy process. The mountains of paperwork can be confusing and overwhelming for people who aren’t prepared or don’t understand the process. They can even be confusing for those who do understand the process.

On the other hand I’m a little concerned about helping out those that maybe lied on their loan applications, or overstretched themselves expecting that the real-estate market would just continue in a never-ending increase in value. What kind of message does the government help send out here? Although this isn’t a bailout, it might still be sending the wrong message to those who got themselves in over their heads and may do so again. There is a cost to everything. Someone (the American taxpayers) will wind up footing the bill here.

The good news is that this isn’t a complete bailout. This seems to help a small number of people, and it’s targetted at those who need the most help. I think this is probably the right approach to resolving this issue.

Cutting down on predatory lending obviously sounds good. Who wants predatory lending practices? But what does this ultimately mean? Will any legislation that tries to cut down on predatory lending have an effect on lending in general?

For me, the big news is providing more transparency in the lending process. I haven’t seen any details on what this means yet, but it certainly sounds promising. I can only hope that something that will benefit us gets passed before we have to go through the process for our upcoming home. I’m very interested to hear more about what this will mean.

Read some more about the announcements at CNN Money. More information on the FHA program can be found at Bloomberg and at MoneyWatch .

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Comments

3 Responses to “The Sub-Prime Mortgage Solution?”

Jonathan on September 3rd, 2007 3:19 am

It’s a tiny bit of a bailout, as those subprime lenders now don’t have to worry about the loans that otherwise might have gone bad. Instead, they are now the potential “problem” of the FHA. But overall since they require the borrowers to prove that they can actually afford the new loans, and the FHA technically funds itself independently of taxpayer money, this decision shouldn’t make too much noise.

This may only be the beginning though…
Eric on September 3rd, 2007 7:18 am

Thank you for the comment! I think you’re right in that it is a tiny bit of a bailout. So far, it seems to be targeted at the poor and middle class, which I think is the right thing to do. It indirectly helps some of the lenders who made questionable loans, but I was happy to see it wasn’t a complete bailout (and especially not one that just benefited the lenders).

I hope you’re wrong about it just being the beginning, but I think we’ll see this topic come back again when the ARMs reset…
Make Friends, Earn Money on January 7th, 2008 1:39 pm

I have mixed feelings about issues like these. Yes, there are unscupulous lenders who will lend to anything that moves, regardless of whether they have the financial capacity to pay it back however we have to take responsibility for our own individual actions. It’s unfair to expect the government to bail us out if we fail to fully assess the risks involved and personally I feel that a large chunk of sub prime mortgage borrowers have done exactly that. They’ve taken the money and run! This is then unfair on the hard working masses who have tried to make carefully balanced decisions and gone without, precisely because they knew they couldn’t afford it. I don’t mean this post to come across as judegmental, as we all have debts or borrow credit, i suppose I just think that everybody should fully assess the risks before they jump in with both feet. I live over in the UK (but have lots of friends over in the US) and house prices here are crazy high but the one good thing is that if you want to own your own property you have to carefully think about the financial implications. We’re lucky if we can put a 1% cash deposit down, with the average property price as 280,000 GBP or 460,000 dollars - for a small house