Friday, September 19, 2008

If the government is going to buy up those bad mortgages…

Yesterday the Dow jumped 410 points on news that the federal government was talking about a plan to use taxpayer money to buy hundreds of billions of dollars of bad mortgages. According to the New York Times:

While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.

I would like to pass on some suggestions from someone I know who has been trying to help people in danger of losing their homes through foreclosure. Many of these mortgages are bad (the borrower cannot make the payments) not because the borrower bought a more expensive house than they could afford but because the terms of the loan were so unfavorable. If these mortgages were converted to fixed rate, 30 year loans at a reasonable interest rate that alone would transform them from problem mortgages into loans that could and would be repaid.

In situations in which the mortgage is for more than the house is now worth and the borrower cannot afford the current payments but could afford a mortgage for what the house is now worth why not have the government forgive the portion of the mortgage above the current market value? If the government bought the mortgage at a "deep discount" then it would likely still be worth more than the government paid for it. It would not be to anyone's advantage for the government to foreclose on a mortgage, leaving a family homeless and the government owning an empty house.

Perhaps there would be reasons why these things could not be done, but they sure seem reasonable to me.

5 comments:

QuadCityImages said...

I haven't looked too deeply into the rumored plan, but I think they're talking about something close to what you describe.

If the government can sacrifice some money (a lot) to lower the value of the mortgages, lower the interest rates, and absorb the mortgages that simply are going to default either way, they could resell the fixed up mortgages for hopefully more than they paid for them. However, if someone ends up paying 5% (or something similarly low) interest because they couldn't follow through on their financial responsibility, others who have done everything right aren't going to be happy to pay 6.35%. I'm not sure what the answer is, but I'm really hoping that people have learned their lesson...

Dave Barrett said...

quadcityimages,
I hope your "people have learned their lesson" comment was referring to the people in the mortgage industry and all the real estate and banking professionals whose greed and short-sightedness was the primary cause of this mess. If it was not and you think that the borrowers were at fault here you need to do a bit more reading about what the experts are saying about this. Countrywide and other mortgage providers were encouraging their agents to put borrowers into higher rate and riskier loans.
Consumers have always been encouraged to take the advice of the experts and professions in matters like buying a house. The main problem is that those experts were getting greedy and steering their clients into riskier deals because there was more profit in it for the agent.
The main lesson borrows should have learned from this is to support politicians who call for increased regulation and oversight.

QuadCityImages said...

You don't think there's a chunk of thse mortgages that were just people buying more house than they should have? There's plenty of blame to go around on this if you ask me. People in this country don't save up for things anymore; they just get them on credit. Yes, lenders made the problem worse by convincing people these ARMs and 0-down mortgages were good for them, but at the end of the day some borrowers should have known better. Again, I'm not saying there aren't plenty of innocent victims of falling home values or shady lenders. I just don't think every single bad mortgage has an innocent victim borrower.

QuadCityImages said...

And in my original comment "people" meant exactly that. People. Lenders, borrowers, insurers, speculators, regulators, etc.

Dave Barrett said...

quadcityimages,
But do you think the borrowers are EQUALLY to blame? When someone takes out a mortgage and buys a house usually a lot of people are involved in that process and all of them EXCEPT the borrower are professionals supposedly doing their professional duty. If the borrower ends up in a house they cannot afford and/or with less favorable mortgage than was currently available why is this not overwhelmingly the fault of all of the professionals in the room?