If you’ve listened to the news at all lately, you’ve probably heard a lot of talk about the effects of the subprime mortgage crisis. In a nutshell, the crisis began last month when many subprime mortgage owners were forced to foreclose on their homes. Many of these homeowners entered into “subprime” mortgages, meaning that the rate they were paying was lower than the market rate, in exchange for higher interest rates down the road. The “adjustable rate mortgages” (ARMs) have a low introductory interest rate, but reset every 5 years or so to the new market rate. Basically, you’re gambling that the rates won’t rise to a point that you won’t be able to keep up.
Unfortunately, many people took the grasshopper approach, and didn’t bother preparing for an increase in interest rates. Without the ability to meet the higher mortgage payments, many homeowners were forced to foreclose, with banks taking a bit hit. Some lenders took such a big hit that they were forced to file bankruptcy, forcing the market to “freak out” (yes, that’s a technical term).
The blame has already started, of course. Many people blame the lenders for being overly aggressive and lending to anyone who walked through the door. Others blame borrowers (who I think are ultimately to blame) for overstating incomes, or trying too hard to buy a home they couldn’t afford to begin with.
But recently, President Bush outlined ways the federal government can help troubled borrowers keep their homes in an effort to address rising foreclosures fueled by the mortgage crisis. In a move also backed by Ben Bernanke, Federal Reserve Chairman, the government isn’t going to “bail out speculators or those who made the decision to buy a home they knew they could never afford.”
Bush said the Federal Housing Administration, a government agency that provides mortgage insurance to borrowers through lenders in the private sector, would soon launch a program called FHA Secure. The program would let homeowners who have good credit histories but can’t afford their current mortgage payments to refinance into mortgages insured by the FHA.
Bush also urged Congress to modernize and improve the FHA so more homeowners could qualify for the mortgage insurance provided by the agency. Last year the House passed legislation to modernize FHA, but Congress has not yet sent a bill to the White House.
And in one more effort, Bush also pledged to work with Congress to reform a key housing provision of the federal tax code, which will make it easier for homeowners to refinance their mortgages. Under the current rules, if the value of your house declines by $20,000 and your adjustable rate mortgage payments have grown to a level you cannot afford, the bank might modify your mortgage and forgive $20,000 of your loan. But the tax code treats that $20,000 as taxable income. And when your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes.
But I wonder if this help isn’t too little too late? Has anyone ever seen a mortgage document? It’s like 100 pages long full of legalese and loopholes that practically nobody can understand. In my opinion, a large effort should be put into improving lender education. Let’s get that mortgage document down to 10 pages of plain English, and mandatory education classes for new homeowners. The government wouldn’t have to step in and help refinance homes if people were properly educated and knew that an adjustable rate mortgage is not the best move when buying a $1 million home with a $85k income.
But what do you think? Has the government done enough? Should they do more?