Posts tagged ‘Underwater Mortgages’

05/18/2012

Underwater Mortgages: Need “Demand”

When the housing market crashed in 2008, somewhere between 25% and 53% of all homeowners in America, (depending on their geographic region), realized their homes were “underwater,” because they suddenly owed more to the banks on their mortgage balances, than their properties were worth.

The crash was in part caused by “adjustable rate mortgages” that increased to unsustainable levels, causing so many homeowners to default, they triggered a foreclosure crisis. Since the problem was blamed on “easy credit,” tighter rules were implemented, forcing lenders to accept only very creditworthy borrowers, who could start their mortgage schedules with much higher down payments.

As a consequence of resetting the deck, people who were formerly qualified to buy, could no longer do so. The led to a reduction in housing “demand,” at a time when the “supply” on the market was greater than ever, due to all the foreclosures. So we ended up with more houses for sale, but far fewer potential buyers.

In the years to come, underwater homeowners will not get back into the black, until the value of housing market increases to pre-crash levels. The value of homes will not rise, until the quantity of buyers becomes greater than the number of sellers. It is basic economics: “price” rises when “demand” exceeds “supply.”

Since the “supply” of available housing is fixed and finite, the variable that needs adjustment is “demand.” The government needs to trigger more “demand” to bring about a rising tide as to all home values. Today, there are millions who would love to own a home, and could make their monthly payments, but they lack a sufficient down payment, and do not qualify under the new rules.

While stimulating the building of new homes may put people back to work in the construction industry, it does nothing to lessen the oversupply of already existing homes, or to increase the existing weak demand for them.

Gov. Romney said slowing down the foreclosure process, buying up troubled homes, or giving thousands of dollars towards the purchase of a new home, won’t solve the problem. He predicted home prices won’t return, until the market works. His answer is for the government to do nothing, and just hope pre-crash values return, after a decade or so of relatively sluggish sales.

Congressman Paul basically advocated full speed ahead with the foreclosure process, as he said housing debts must be liquidated, as they are only prolonging the agony. If the bad paper had been auctioned and sold, it would have been cleansed by now, he said. As to the bailouts, Paul lamented, if money was to be given out, it should have gone to those who lost mortgages, not the banks.

Putting more money in the hands of buyers is what is needed, so more people can accumulate the down payments they need. This is how the housing market will return. But this can only happen through higher earnings. As long as Romney proposes nothing to help Middle Class people earn more, the housing market will remain flat, and the homes now underwater, will simply remain that way for a long time to come.

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05/11/2012

Adjustable Interest: Still A Big Problem

Between 2001 and 2007, “Adjustable Rate Mortgages” were sold by predatory lenders like Countrywide, who profited quickly by pocketing high closing costs, and then by promptly selling their Notes to Fannie Mae or Freddie Mac, so they could recoup their principle. When unsuspecting borrowers later faced significant interest rate increases, millions found themselves unable to pay, and fell into default. While mortgage foreclosures grew at a galloping rate, the crisis turned into a housing sector depression. As fair market values fell precipitously, millions of homes took on the label of being “underwater,” because their mortgage balances exceeded what could be realized in an arms-length sale.

Even though “adjustable rate mortgages” and “interest only” loans were a major contributing factor in the 2008 housing collapse, they are still used today, because wealthy financiers continue to purchase the votes of House and Senate members, and this keeps Congress from banning usurious lending practices. Despite the best efforts of Democrats through the Dodd-Frank Bill, variable rate mortgages are not eliminated, and are not even regulated.

There was a time in America, however, not so long ago, when “variable interest rates” were not allowed, and relatively low caps were set on “fixed rate mortgages.” Historically, each state had laws that set maximum interest rates. After the United States was formed, most states limited interest rates to no more than 6%.

During the right-wing Reagan Revolution, conservatives started pushing de-regulation as to nearly everything, including interest rates. When South Dakota completely eliminated their cap on interest in 1978, many credit card companies relocated there. With the approval of a conservative U.S. Supreme Court, they started charging unlimited sums of interest under South Dakota law, even though their credit cards were being used in states that had caps.

The loss of control on interest rates got another boost under the federal Depository Institutions Deregulation and Monetary Control Act, which exempted federal banks from state usury laws in 1980.

Before the reckless Reagan Revolution, the country had witnessed a great expansion in housing after WW II, during the 1950s and 1960s, when banks and savings and loans were limited by law to using only “fixed rate mortgages” with capped low interest rates. Payment schedules remained unchanged for 15 to 30 years, and there were no spikes or adjustments to throw buyers into default.

While Wall Street banks make billions from variable interest rates, they are nowhere near as good for consumers as fixed rates. The absence of caps on the amount of interest that can be charged, only leads to unnecessary profit-taking, and many hardships for the millions of victims who lost their homes in the crash of 2008.