Tuesday, December 04, 2007

Bush administration jawbones to stop foreclosures, subprime rate hikes, balloons

The Bush administration, with all its neo-conservatism (with a curious spin on individualism) is moving to regulate or at least jawbone the mortgage industry into stopping a tsunami of defaults and foreclosures as the low rate term periods of more homeowners come to an end. A typical story ("U.S. moves to stem foreclosures") is by Patrice Hill on p A1 of the Dec. 4 Washington Times, here.

Treasury Secretary Henry Paulson Jr. is getting lenders to postpone rate increases on subprime homeowners who are current on mortgage payments for three to seven years. Senator Hillary Clinton has called for a five year freeze on introductory subprime rates, and a 90-day moratorium on foreclosures. John Edwards wants to prohibit loans with balloon payments, which buyers have expected to get out of by refinancing. The balloon problem would appear to the novice to be the worst problem. In comparison to individual homes and condos, church construction loans typically have balloon payments, as I have heard many times in my years of association with MCC churches.

Ideologically, this would seem to be a case of “I am my brother’s keeper.” One could say, doesn’t this reward buyers and builders who (in the spirit of Coen Brothers movies) wanted something for nothing? Maybe. But foreclosures affect entire neighborhoods, not just the individual homeowners, and undermine the stability even of investor tax-free bond markets since so many localities invest in mortgages.

Remember, 40th birthdays are usually marked by black balloons, especially in the workplace.

Update: Dec. 6

The DC Examiner has a story syndicated from New York by J. W. Elphinstone, "Bill Coming Due on Sinking Home Equity" which the DC paper re-titled (p 22, Thursday Dec 6) as "Homeownership a misnomer as equity fell to all-time lows during housing boom,: link here.

Much is made of the lack of down payment. Remember thirty years ago when couples struggled to meet a 20% down payment for a conventional loan (which eliminated most of the PMI insurance)? Of course, making a down payment reduces or eliminates most of one's cash emergency fund, a factor that one must weigh against one's job skills or income-generating ability in a job market that itself seems so volatile. Skills go fallow (like mainframe programming). Home equity loans and "reverse mortgages" have also reduced remaining equity.

On Dec. 6 The Washington Post carried an AP story by David Cho and Neil Irwin on p A1, "Bush Wins Agreement To Freeze Mortgages: Hard-Up Owners Won't See Adjustable Rates Soar" which will protect (for five years) only those non-delinquent primary-residence homeowners who cannot afford the rate increases by some mathematical formula and who purchased their homes since 2005, story here. Later in the day the Post website carried an AP story "Mortgage Rate Freeze Reached" By Martin Crutsinger, AP Economics Writer, here.

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