How to Fix the Foreclosure Mortgage Mess

First we have to understand exactly what the foreclosure mortgage mess really is.

How did we get in this mess?

It has not been too many years in our past that one could not get a mortgage on a new home unless they had fifty percent of their own money for a down payment. 

As time has gone by, that down payment requirement has gradually decreased.  And in recent years there have been a number of loan programs that haven’t required a down payment at all.  In other words, the buyer could get 100% financing.  In addition, if the house would appraise for enough over the sales price then the closing costs could even be financed into the loan.  This allowed buyers to literally move in to a new home with very little or no money at all invested.

Investors primarily put their money into the stock market, gold and real estate.  When the stock market crashes then the real estate market thrives and vice versa.

During our recent real estate hay day investors became very competitive.  Loan requirements were reduced in order to compete for the buyer’s mortgage.  Not only was 100% financing offered, credit requirements were less strict and debt to income ratios were raised.

Where buyers were previously allowed to have only 39% of their income in debt (which included their house payment) buyers were allowed to have 50-55% in debt.  This often allowed people to purchase a home with a payment that they really couldn’t afford.

These type mortgage loans were referred to as “sub-prime” loans and carried a much higher interest rate.  This higher interest rate is what made a lender willing to take a risk on a less credit worthy buyer. 

In order for these sub-prime buyers to get a lesser rate (but still higher than normal rates) buyers would opt to take an adjustable rate mortgage.  This meant that the interest rate would increase by a certain amount at certain intervals.  Adjustable rate mortgages came in one, two, three and five year terms.  They usually had a two percent cap to the annual increase.

Buyers would opt for the adjustable rate mortgage with good intentions of re-financing their loans for a better rate before the adjustment term expired and their rate increased causing a larger house payment.

Simply making their house payments on time for a year or two would improve their credit scores and allow them to be able to refinance for the better rate and lower house payment.

And had the buyer been able to indeed make their house payments on time then everything would have worked as planned. 

But, too many buyers slipped up for one reason or another and had multiple late payments which prevented them from re-financing their loan before their interest rate adjustment period.  Therefore, their interest rate increased and their house payments went up.  This increased house payment plus the very high unexpected increase in gasoline and other items put an additional strain on their budgets which led to additional late payments and eventually foreclosure.

A certain amount of foreclosures have always happened in spite of lenders best efforts to verify a buyer’s credit worthiness.

So what happened this time?

The credit requirements were less strict, so buyers that already had some credit history problems were allowed to get mortgage loans on homes.

Therefore there were a larger number of mortgages issued to the “sub-prime” borrowers with adjustable rate mortgages that were unable to re-finance and eventually fell to foreclosure.

For some lenders whose portfolio of loans was made up primarily of “sub-prime” loans they found too many of their loans in foreclosure and therefore were forced to close their doors themselves.

So how do we fix the mess?

It would have been nice if we had paid attention to the old adage of “a stitch in time saves nine” but too often the thread has to ravel all the way before we get the needle out.

So now it has become a mess and we have to recover from it.  It won’t just go away and the government can’t really throw money at the situation and make it heal.

As with so many things in life, those who are innocent bystanders have gotten hurt by someone else’s behavior.  Home owners, who have in good faith, made all of their payments on time, have been negatively affected by having the value of their homes drop considerably.  Their hard earned equity in their homes has all but disappeared.

Now we need to attack from all sides.

The mortgage lenders have already taken some corrective action to curtail the foreclosure rates in loans made in the future.  They have gone back to a higher credit worthiness requirement of new applicants for future mortgage loans.  Prior to the “mortgage mess” a buyer could get a 100% financing on a home with a credit score of just 580.  Now, that has been raised back up to 620.  This along with tighter debt to income ratio restrictions will allow only buyers who have previously shown a willingness and ability to repay their debt to be approved for loans.

Of course, this eliminates a huge segment of the buyers market that was buying homes in the years leading up to the mortgage mess.  And I really feel that we have to find a way to help these people achieve home ownership in the future.  

If government wants to help then stop the insane increase in the cost of gasoline.  This will put more money back into people’s pockets and into their mortgage payments in order to salvage their homes.

Lenders can allow current mortgage holders to refinance their existing loan for a lower fixed interest rate regardless of their credit scores or late payments on their existing loan.  These rates don’t have to be lowered to the same rate as those people with good to excellent credit but they can be lowered several percentage points giving the mortgagee a fighting change to hold onto their home.  Some mortgage holders are currently paying 14 to 16 percent interest due to ARM adjustments.  Allow a reduction to say 9.5 percent.  This is still a good return on the investor’s money and will reduce considerably the buyer’s payment; a better solution for both than foreclosure.

The more people that can stay in their homes the quicker home values will begin to stabilize and increase again.  And the quicker everyone who owns a home can begin to get back their equity in their homes.

A number of the people losing their homes were first time home buyers and did not understand the responsibility of home ownership.  They simply didn’t understand the cost of maintaining a house.

Others didn’t understand the commitment of house payments.  They had always been a renter and if they got behind on their rent, they simply moved.

Some are giving up their homes because they feel they owe more on the home than it is worth.  These people need to realize that their house values will return with time.  Rather than ruining their credit by foreclosure on their home that they need to remain “steady as you go” and continue to make their payments on time and wait out the storm. 

The most alarming group is the people who have never learned to ‘save money’ for anything.  Not for a down payment, not to pay cash for items and thereby save money on interest and certainly not for a rainy day.  This is a group that is growing at an alarming rate in our society. 

Buyers who are good managers of their money, when told the amount of a new house payment they can qualify for will often say no, that high of a payment is not in our budget. They will then look for a house in a price range which will give them a payment that they feel they can afford.  These people manage their money, not the lenders.  And usually these people consistently make their mortgage payments on time.

We could simply say that some people just don’t deserve to own a home.  And in some cases that would be true.  However, there are those that simply are uneducated in the area of home ownership and money management.

We now have a glut of empty homes out there.  We all need to do everything we can to help get responsible people into these homes.

Our schools do not teach these simple basics of life and many parents can’t teach these things because they have never learned them themselves.

Short of our schools and parents beginning to engrain the importance of budgeting, saving, living within ones means and having your outgo always be less than your income, then others have to take on this responsibility.  

Churches should begin training and mentoring programs for not only their congregation but for the young people and potential first time home buyers in their neighborhoods. 

Employers should offer this same type training to their employees.

I’m opposed to the government offering training programs because too many government subsidized providers will simply be offering the training to get the government payments and the quality of the training will not be as sincere as that training offered by people who know each other like in our churches and work environments. 

With this type of education and training we can bring a group of buyers into the market place for long term responsible homeownership.  This will be a group of people that would have previously been a part of the foreclosure mortgage mess.

The other group that can help turn around the mortgage health are those people who have good credit and can currently qualify for a mortgage.  This group should get out there and find that home of their dreams and buy it now.  It is a perfect time to buy; rates are low and prices are great.  The mortgage mess has affected this group only in a positive way.  This is strictly a buyer’s market but it won’t last, so one should not sit around and wait until it’s too late.  These good deals won’t last for ever nor, will interest rates remain this low much longer.

Current mortgage holders that are flirting with foreclosure should realize the importance of retaining their home.  This is your future.  It is the roof over your head.  It is a place for your children to grow up feeling safe and grounded.  It is more important than cable TV and other expensive entertainment.  If you preserver one day it will be paid off.  Rent never ends.    

So as you can see it is going to take an interest and effort by everyone.  Not just the lenders, the government, the ones in foreclosure, but everyone.  If you are someone who is snug in your home situation then mentor someone who is not.  If you are someone who is in trouble with your mortgage payments then accept help from others; not a handout help but be open to mentoring from one who is successfully holding on to their home.  Be willing to give up short term pleasures like cable TV, cell phones, etc. for the benefit of long term security of home ownership.

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