Your Thoughts Needed on Loans & Homes
Posted on December 9, 2007 14 Comments
From what I can tell, last week’s financial news was pretty astonishing: The Bush administration announced an agreement with mortgage companies to freeze interest rates for five years on subprime loans. According to a New York Times article on 12/7, the move is, “a way to help deserving homeowners while keeping the housing slump from further affecting an economy that is basically sound.” The new policy is expected to help save about two million people from impending foreclosures, and the specifications to qualify for the freeze are expected to be pretty stringent.
I have mixed feelings about this. I want to be happy that millions of people will not loose their homes this year. I want to feel good that this move will help the economy. And yet, personally, as someone who is tediously budgeting and slowly working to save enough to afford a downpayment, I can’t help but feel a little frustrated about it.
I struggle to understand how such unaffordable loans were lent to people in the first place. Who are the borrowers? How can you buy a house and not understand the circumstances? As a renter, I simply don’t have the background knowledge of the home-buying process. Maybe the paperwork is confusing. Maybe the lenders are dishonest. I don’t know. But for millions of these loans to have been sold … something doesn’t add up for me. How was it allowed?
At the risk of sounding cynical, why can banks lend such unsafe loans in the first place? If someone doesn’t have a good credit history and hasn’t taken steps to repair it, aren’t the odds that that lender won’t be able to repay? I mean really, if someone can’t afford the mortgage payments now, has a history of bad credit and has limitations on his/her income earning ability … how does it make any sense to lend this money? Is the hope that this person will sell before their mortgage rates switch? (No tone intended there, I’m just curious.)
Clearly there was a lot going on that I just don’t understand. (I have to read up on it.) And now, it seems, there’s a plan to at least stem some of the damage. That’s where the frustration comes in on my part.
Tell me if this is a totally selfish point of view… and maybe the frustration comes from lack of knowledge … that’s sort of why I’m posting this. I don’t want to rant about how crappy this is for those of us trying really hard to live within our means, rather than using credit to live above our means, but to initiate a dialogue.
To me, it seems to me there are now there are double standards for homeowners. If you have taken on a loan that’s too big, your interest rates will now change to reflect your financial situation so that you can keep your home (provided you’ve made all your payments on time in the past). However, if you are just now applying to get a home loan, or if you can actually afford the rates you’re locked into, those lower frozen rates mentioned above, won’t be available to you.
Is that right? If so, that’s like being in school, and working extra hard to do all your homework on time, going without sleeping and stressing out about grades, and then when you turn your assignment in, the professor announces that those who didn’t complete the work can have two extra days to complete it and still get the same grade. (Even if those kids missed cause they had a cold, I still always got upset about that.)
Basically, it doesn’t seem fair to those who did their homework. They should get the extra days, too. Or, in this case, they should be able to change their interest rates, too.
Obviously I’m oversimplifying. So can you help me to better understand?
Also, my other question is: What happens after 5 years? Are we expecting these two million people to sell their houses and move into smaller ones or more affordable rentals? Who is going to help them do that? Are we going to freeze rates again after five years for only a certain group of people again?
I want to believe this is a good idea. I want to not see this as unfair to the rest of the folks. So tell me how it’s helping us. Or just tell me to shut up and stop whining because I’m being totally selfish and only thinking about myself. Either way. I plan to publish some of the comments, so make your answers good ones!
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December 9th, 2007 @ 9:55 pm
It does seem unfair, Nicole–I agree.
I think that the lenders saw $$, figured out a way to lend money to people that otherwise wouldn’t have had an opportunity to buy a house…but were counting on the market going up.
The thing I keep hearing is that the homeowners were advised that this was the one way that they could get into the real estate market while things were good…the house would then increase in value over the next 3-5years, at which point they could have enough equity to refinance to a 30 year fixed before the teaser rate was up. As we all know, that didn’t happen–house values plummeted and people ended up upside down on their houses, unable to refinance. And now people are stuck with these horrible mortgages…and it’s a crazy downward spiral, ’cause when people default on their loans and the bank forecloses, the housing prices near that house go down even more! ugh.
I don’t know who is at fault–the mortgage lenders or the homeowners. It seems like a little of both. This shouldn’t have been legal, since we didn’t know FOR SURE that the housing values were going to go up.
But the damage is done. and now we have to figure out a way to deal with it. My thought is that the gov’t wouldn’t have done anything about it if it didn’t have the potential to ruin the economy, and if lobbyists didn’t have some pull in the legislation.
December 9th, 2007 @ 10:15 pm
Obviously, the blame has to rest with individual home buyers. When you take on a loan that could potentially be too much for you once the adjustable rate goes up, then you’re the one who will have to deal with the consequences. I’m guessing though, that too many people who are now in a bad situation didn’t take the time to find out what could happen in the future (or just didn’t want to believe it.) They just wanted what they wanted when they wanted it. And in the moment, it looked like something they could afford.
As for how the banking industry could be allowed to give people such potentially problematic loans – one word: lobbyists. The banking industry has enough money and power to have political sway, and there is enough money from this industry going into the pockets of politicians, so of course the government isn’t going to write legislation that is going to alienate the industries that keep them in private jets and luxury hotel rooms.
The disappointing thing about this new “help” is that it isn’t even going to help the people who need it most. You can not be one payment behind on your mortgage and get help from this new rate freeze. If you’re already behind, too bad for you.
I feel the way you do: if you are irresponsible enough to buy a house you now can’t afford, then I don’t feel like you should get government help. But, when I think about all the families that will have a few more years to either sell their homes and downsize, or figure out a way to make some extra income so they can stay, I don’t have a problem with the government freezing rates on these loans for a few years. At least now, these people have had a real scare and might be motivated to get themselves in a better position for when the rate increase will happen for real. Meanwhile, I don’t lose anything by being a responsible homeowner who continues to live in a home we bought almost 10 years ago. It might have one less bedroom than I’d like, but when I can pay my bills every month with money left for savings, a bigger house doesn’t look very important at all!
December 9th, 2007 @ 11:31 pm
Hey Nicole, I work at a credit union and we sell mortgages so I have an ok understanding of what is going on (and my ex is a mortgage broker). First off, I’d like to say that out of our entire mortgage portfolio, we only have one sub-prime loan. I think you’ll find most credit unions still have healthy portfolios because they have different values from banks. Anyway, we have a lot of members coming to us now who did not get loans with us (because they didn’t qualify for a ‘normal’ loan and went elsewhere) and are asking for our help. We are doing what we can.
When I was with the mortgage broker, it was when the housing market was booming. He was putting people into homes who didn’t even have jobs or savings! The reason he did this was to 1) make money and 2) make his clients happy. I’m in no way condoning what he did, but he was under a lot of pressure to make these loans. He was on call all the time and was harassed to do all he could to get people the ‘American Dream’. He was stressed out beyond belief and I honestly think part of it was b/c he knew what he was doing was wrong.
I think the blame falls on everyone involved, not just the homeowners. The industry did a great job of making ppl feel that they would be able to afford their payments. I do feel for them, but when I was offered the opportunity to buy the condo I was renting, I passed because I was not comfortable with almost all my salary going toward a home. Obviously, my priorities are different than a lot of folks.
I don’t know if my response is at all helpful! Sorry.
December 10th, 2007 @ 1:11 am
Hey, I think everyone is asking those questions — but I’ve talked to a lot (I’m a biz reporter in Cali) of brokers — and they say it needs to happen. Why? Because foreclosures hurt everyone — homeowners trying to sell their homes (drives down values), homeowners in their homes (dilapidated homes and the people that move into them can hurt the neighborhood), obviously those that go into foreclosure, and it hurts the lenders. So while it is unfair for buyers now (though interest rates here keep dropping because of it, and so do home prices — so they are getting an advantage) these buyers are likely going to creditable people and will keep their house.
The National Treasury and everyone involved with that recognized that a wrong was done by aggressive Realtors, predatory lenders and the homeowners themselves for getting in over their head, and decided to give everyone a 5-year break.
What will happen after that term is over? There will probably be a slew of foreclosures again — but many are hoping that in the next five years those people sell their homes, change status, whatever — maybe it will slow down the process instead of right now where it’s so many every month.
I kind of feel like it’s a step of procrastination, and in California, the inflated market could stand to drop a lot more — but personally, I’ll probably be ready to buy a house in five years — so I’m impartial. I know that sounds awful, but just as buyers benefited from low interest rates 3 years ago and buyers are benefiting from low home prices now — I’m guessing it will happen again in five years.
Happy Blogging!
Natalie
December 10th, 2007 @ 4:26 am
Hi BB,
I feel the same way. I put off buying a home until this year because I wanted to do it responsibly. I could have bought a few years ago with one of those teaser deals, but I felt it wasn’t the right thing to do. I probably paid more for my home, but I rest easy every night knowing I CAN pay for it.
Part of the reason the government got involved is that the problem is larger than just the real estate marketing (realtors, lenders, etc.). If too many homes go into foreclosure, it impacts other businesses that support, such as construction, etc. It could plunge many more businesses into trouble.
At the end of the day, this country is very financially illiterate. People think of things in terms of payments, not whether or not they can afford something. It’s sad that more people don’t realize what they are paying for. I’m a big believer in personal responsibility, so I think buyers should take the chance to understand what they’re paying for (be it cars, clothes or condos), and weigh if they can really afford it. In this consumer-based economy, I don’t think the day of reckoning is coming yet, and in the mean time, people like you who are responsible won’t always be rewarded for that. Thanks for being responsible… you are setting a great example to many.
December 10th, 2007 @ 10:59 am
Nicole:
I see this whole mess as a reminder that “we” didn’t learn anything from the savings and loans mess from years back. The Government (read taxpayers) absorbed the cost of that fiasco. I think this attempt to help those who are about to slip is simply to shore up our nations economy (read financial markets) and minimize future losses to the government (read taxpayers). The fact that it is purported to help those who are barely hangin’ on is BS and is secondary to the primary purposes. I think lenders, and lending laws need to be seriously changed, punishments meted out and serious changes made to truth in lending. It is too easy to borry more than one needs. It is true that a lot of us live based on what kind of installment plan we can afford. I saw an ad recently for financing a new car for 72 months and a 40 year mortgage. .come on!!!!
December 10th, 2007 @ 2:48 pm
I feel you Nicole, I’m so upset over what is going on nut I have to say also support it. Main reason is, I saved up to buy my condo, I got the down payment and I went with 30 year loan. Compared to my neighbor who went with 5 year adjustable and she is foreclosed on property now. Because of her foreclosure value of my property slumped in 2 months. So yeah I’m mad, I planned and saved for my place and because some people just wanted to flip real estate I’m paying the price. If this plan with Bush works then maybe other will be luckier that I and in 5 years people will sell their homes to avoid foreclosure, but then again people are not so smart, they like the status they have as a “home owner of a beautiful expensive condo/house” than anything.
I’m so mad I can barely type this message.
December 10th, 2007 @ 4:20 pm
Here’s my understanding. This deal will go to home owners who are currently making their payments just fine, but will not be able to do that when their adjustable rate jumps next year. In selling the mortgage, the idea was that the homeowners would be able to refinance before the rate jumps. With the “credit crunch” this is now unlikely. Also, if they are forced to get out of their house, they won’t be able to get a very good price because of the “housing market slump”. Banks shouldn’t have sold those loans–they took a gamble and they lost. Because of that, we all lose a little.
People who are already missing payments at the current rate, well, they are out of luck (as they probably should be–as you mentioned, they may not ever be able to afford the house). For the ones who are helped, maybe in the next 5 years they can sell the house if the market improves
It does suck a little for those of us renting and living with in our means and who are intelligent about researching documents before we sign them. It is a bail out for them. But I think to just let everyone colapse under this problem would be worse for everyone.
December 10th, 2007 @ 6:57 pm
Personally, I think this is a “perfect storm” of circumstances and unethical people who are fueled by greed.
People who would never have been able to afford a home the “old-fashioned way” were promised pie-in-the-sky and jumped at it. I can’t really fault them, because 99.9% of people nowadays would hold their hand out if someone promises to put thousands of dollars in it without questioning any ethics at all.
I’m afraid the ethics that once made this country great have vanished with The Greatest Generation’s passing on. The masses now thrive on reality TV, celebrity worship, 5,000 calorie junk food, and as little mental and physical work as possible. I’m afraid the good old standards from the WWII days (saving to buy a home and living within your means) have disappeared (for the masses) along with honesty in government.
The real estate industry saw fat commissions on inflated sales prices and jumped at it. Whether a homeowner can actually pay off the loan has nothing to do with a real estate agent’s commissions; they get their commission on the sale, and after their commission comes through, they’re done with the home. So they really had no interest in qualifying a potential homeowner.
The lending industry had lots of business coming in with lots of loans, which they would then sell to others. They got their money, and the loans got passed on to others, caveat emptor. It’s like multi-level marketing; someone gets left holding the bag, but as long as it’s not “me,” no one else cares.
Lastly, George is trying to do something to redeem his image and appease his guilt with the masses of poor folks whose children are dying in Iraq while at the same time trying to give his cronies an expensive penultimate Christmas gift.
Tah-dah!! This “perfect storm” is made to order. You have the poor who can keep their homes for two more years and the rich who can profit off those loans for two more years. George gets to feel better and the masses of poor folk will again think he’s the Savior. Real estate agents will get to again earn more commissions. When the two years expires, George will be out of power, will have gotten his financial payoffs, and will no longer care what happens in this situation. The rich will have two more years to figure out a way to turn this to their advantage and make more profits.
I so admire your blog and your situation, Nic, and the values you try to live by, paying as you go and saving money. This country would be a much better place if everyone did that.
I think that in the end, this financial house of cards that is presently the economy in this country now will come to a crashing end. Living on wildly inflated credit and being encouraged to spend even more that people don’t have and never have a hope of having is burning the candle at both ends, and eventually it will destroy itself.
I agree with you totally that this situation is SO not fair, but it really is par for the course of the economics of the USA over the last seven years. It’s a live-for-the-day mentality and maybe tomorrow won’t ever come.
I think the only “fairness” will come when finally the piper does come around to be paid, but unfortunately, he’ll probably take the rest of us with him. Masses of uneducated and lazy and greedy people usually can manage to do a civilization in.
Excuse me for being cynical, but this is the way I see the situation, just the most current example of the US losing its soul.
December 10th, 2007 @ 7:32 pm
Nicole, I totally agree with you. I don’t agree with the government getting involved in the private sector. I also feel like those who didn’t do their due diligence are being rewarded. My husband and I live in a home that is well within our means and we have a 15 year fixed mortgage. We got that mortgage with a great rate because we have been responsible with our credit, have excellent credit scores, etc. I know that tons of foreclosures could move the economy into recession, but recession is part of the economic cycle, and people tend to forget that.
I feel like more and more those who are irresponsible and don’t take the time to do their homework are rewarded. It drives me nuts.
December 10th, 2007 @ 7:43 pm
Nicole,
Some comments have talked about this rate freeze not helping people hold on to their homes. I read an article in one of the business magazines (BusinessWeek or Forbes) and it said that most of the ARM’s (Adjustable Rate Mortgages) had not even began to adjust upward. It predicted that the economy would not feel the full brunt until 2009.
I do think that freezing rates will keep people in their homes. I don’t agree with this from a personal responsability perspective but I will admit that the effects of foreclosure hurt all of us more in the long run.
December 10th, 2007 @ 10:26 pm
I know that mamy times banks will pre-approve a person for way more than they can technically afford, using a percentage of their income as a basis for the number instead of reality. When my husband and I bought our house last year, we purposely only had them look at his income and knew the payment we assumed we could afford based on all the other details of our lives. A friend of mine bought a house for several thousand more than ours, on less than half of my DH’s income – and she’s struggled ever since. Banks don’t really care if you can afford it or not – they simply want their money.
People who didn’t look at the actual figures and took the banks word for it that they could afford said house were irresponsible, but there were MANY of them.
December 14th, 2007 @ 4:04 pm
Nicole,
I worked in the mortgage industry for years. The blame, in my opinion, lies with both the lenders and the borrowers. It IS a lot of paperwork and the products ARE confusing and many brokers don’t even understand it themselves, they just want your commission. There were so many unscrupulous lenders willing to put anyone in any product just to get the commission and then sell that sketchy loan to another lender who then sold it on, etc., etc. Lenders took on more and more risk because the money was sooo good. Well, here we are. Buyers need to do their due diligence as insurance against bad lenders. This will lead to more secure homeowners.
Great blog!
Jerry
http://www.leads4insurance.com
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