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Friday, December 07, 2007

Subprime Mortgage Interest Rate Freeze - Private Sector Solution or Government Bailout?

Yesterday, President Bush announced a plan to address the current mortgage crisis.  The plan, which includes a 5-year freeze on certain subprime mortgage interest rates, was a result of the Hope Now Alliance.  According to the President, "Hope Now is an example of government bringing together members of the private sector to voluntarily address a national challenge without government subsidies and without government mandates".

The freeze is not a government mandate - it's an agreement by many mortgage industry leaders to freeze the interest rates on certain subprime mortgages for 5 years.  The hope is that during those 5 years, real estate sales and values will increase allowing these borrowers to sell or refinance their homes.  Not all mortgage companies are onboard, but many of the major players in the industry are involved.  And not all distressed borrowers will benefit from the program.  In order to qualify, the borrower must meet the following minimum criteria:

  • Home must be owner-occupied
  • Cannot have missed any mortgage payments
  • Loan must have been taken out between 2005 and July 30, 2007
  • Interest rate must be scheduled to increase in 2008 and 2009

But there's more to the plan than just a subprime rate freeze for a few lucky borrowers.  Bush also announced:

  1. The Federal Reserve intends to tighten lending standards
  2. The federal government is taking regulatory actions "to make the mortgage industry more transparent, reliable and fair."
  3. FHA is launching a program called FHA Secure (announced earlier this year), intended to help borrowers refinance existing loans (ARMs which are going up), and enable FHA to be more flexible in how to offset the refinancing
  4. Congress should modernize FHA to enable government sponsored enterprises such as Fannie Mae and Freddie Mac to move more liquidity into the market
  5. Congress should temporarily reform the tax code so homeowners do not have to pay taxes on the portions of their mortgages which are forgiven (which is usually treated as taxable income)

Many criticize the President's plan as a "bailout", but the President insists his plan is a private-sector solution.  I agree this freeze on interest rates is not a government bailout.  And although I'm a real estate agent, I can even applaud the idea of tighter lending standards and a more transparent mortgage industry (but personally I think the 20+ pages of disclosures already given to borrowers is quite sufficient as long as they read them - and adding more disclosures would probably make borrowers even LESS likely to read the fine print). 

But the FHA Secure program has me totally baffled.  I just don't get how helping (risky) borrowers to refinance loans they couldn't afford to begin with is going to help anybody...except the subprime lenders who get to pass these risky loans off to the taxpayers.  You see, when these loans get refinanced as FHA loans, they'll be government insured and then the taxpayers will eat the losses when these borrowers foreclose.  And many of these borrowers will foreclose eventually - FHA Secure will simply prolong the agony and shift the financial burden of these foreclosures from the subprime lender, to the American taxpayer.  I'm especially confused by the idea that FHA Secure is supposed to "enable FHA to be more flexible in how to offset the refinancing".  So in other words, our government is planning to help these borrowers by using the very same type of "creative financing" that got these borrowers into trouble in the first place?  At least the lenders who originally made these risky loans stood some chance of making a profit.  But what do American taxpayers get in return for guaranteeing these risky loans?  We get nothing, except possibly higher taxes to pay for the bureaucracy and resulting foreclosures.

As far as "reforming FHA" goes, does that mean changing the rules so the government can guarantee even more risky loans?  I can definitely agree that maximum FHA loan amounts need to be modernized after the recent run up of real estate prices, but I'm very skeptical of other potential FHA reforms.  I also totally disagree that these borrowers who get out of paying part of their mortgage should also get out of paying taxes on the forgiven amounts.  If someone gives you free money, the least you can do is pay the taxes on it.  If nothing else, these borrowers should be paying a fee to the government for negotiating them such a good deal.  And if these borrowers who benefit from the plan are getting tax breaks, who's going to pay for the cost of this mess?  Should the 98.5% of American homeowners who are NOT in foreclosure be the ones to pay?

Life is not fair, and we have to take the good with the bad.  So I guess the term, "lesser of two evils" comes to mind here.  I don't feel it's the government's responsibility to help homeowners escape loan payments they agreed to pay, nor is it the government's job to help homeowners keep real estate they can't afford.  But I also don't believe in cutting off my nose to spite my face.  If the problem is ignored, the mortgage fallout and its affects on both real estate and Wall Street could put the entire U.S. economy into a recession.  Obviously, then we would all suffer.

I'm generally leery of any government interference in the free market, but the President has negotiated a voluntary plan with leaders of the mortgage industry who realize it's better to get paid less interest on a loan, than to have the loan foreclose and get nothing at all.  Quite frankly, I haven't heard any better ideas and while I disagree with parts of the plan, I'm optimistic it will help some borrowers.  But more importantly, I think it will improve consumer confidence in both the mortgage industry and the real estate market.

The President acknowledges "there is no perfect solution" to the mortgage problem, and this problem will require a multi-faceted solution.  I definitely give the President credit for taking action and attempting to resolve the subprime meltdown, especially during this extremely political season when President Bush is being attacked from every direction, for everything he does or says.

On a lighter note, when announcing this plan, the President accidentally gave out the wrong phone number for the mortgage help hotline - he even repeated the wrong number twice!  You gotta love a guy who has good intentions, but constantly gets tripped up on the little details!  The incorrect phone number announced by the President actually belongs to the Freedom Christian Academy in Texas, who were apparently good sports about the mix up!   Hopefully, BlogArizona readers don't need to call the mortgage help hotline, but just in case, the correct number is 1-888-995-HOPE.

Visit Shannon Hubbard's Home Page     Written By: Shannon Hubbard
Realtor®-Investor

Great American Realty, Inc.

Cell: (480) 695-6672
Email me

Related article from August 31, 2007: "President Says Reform FHA & Fannie Mae - Is there a Mortgage Bailout Coming?"

Posted by Shannon Hubbard, AZ Realtor & Computer Guru on December 7, 2007 | Permalink

Comments

The presidents idea isn't a mortgage bailout like last summers "amnesty" bill wasn't amnesty. ok Mr. Bush.

Posted by: Homeowner who makes timely payments every month | Dec 7, 2007 11:53:45 AM

To the person who made the comment above: even though most of us do pay our mortgages each month, something has to be done about the increasing numbers of people who can't make those payments anymore. The blame game is irrelevant now, since even a very small minority of homeowners foreclosing could really ruin the economy for the whole country. Making your payments on time every month won't change that, but the result of doing nothing could be that people like you lose there jobs and are no longer able to make there mortgage payments either. Then you would want the government to do something to help. I agree with Shannon, this is the lesser of 2 evils and the president should be congratulated for taking leadership on this issue.

Posted by: Arizona real estate broker | Dec 7, 2007 12:24:08 PM

To Arizona real estate broker: did I say I disagreeed with the presidents idea? No I didn't say that.I'm just sick and tired of politcians who won't say it like it is. thats all. its a mortgage bailout so the president should just say its a mortgage bailout. but instead he says its not a mortgage bailout. please.

Posted by: Homeowner who makes timely payments every month | Dec 7, 2007 12:48:41 PM

"Arizona real estate broker" and "Homeowner who makes timely payments every month" -

For the most part, I agree with both of your comments, and in principle, I think you both agree with each other. Thanks for stopping by BlogArizona!

Posted by: Shannon Hubbard | Dec 7, 2007 3:20:35 PM

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