Subprime Bailout Debate

by benborden

There is a debate going on between those that feel the Federal Government, Mortgage Lenders, Builders and Banks are under an obligation to assist homeowners whose loans are getting ready to and have adjusted and to assist those that are already facing foreclosure. The other side of the debate says that there should be no assistance and let the cards fall where they may, that a government bailout is a free license to go out without caution and the government will save you.

Side One: What are the government leaders saying by bailing out these borrowers? These home owners were given an opportunity; an opportunity that they otherwise would not have had. Subprime loans where designed, in theory anyway, to help those with bad credit get a loan and over the course of the next 2 to 3 years repair their credit and get into a low rate good credit loan. Problem with that is 90% of the people with bad credit have bad credit because they never pay their bills and can not manage their debt. The majority of subprime borrowers did nothing once the loan closed to repair their credit. They already have bad credit let them go to foreclosure. Bailing them out is just giving a green light to go out and mismanage their finances again. Give them tough love do not enable them. Screw ‘em. Let them drown. These borrowers need to learn from their mistakes.

Side Two: Why not help these borrowers, what if it was you and your children? Maybe it’s not ALL their fault. Mortgage Lenders, Builders and Banks gave subprime loans in the hopes that they would refinance once their credit got better. Refinance into what?

First, lending guidelines and programs have changed so much and many loan programs dropped all together you’d have to be Pope Benedict XVI to get a refinance loan these days. High LTV (loan to value), no cash out refinances are being turned down by Fannie Mae with high 600 credit scores and even some low 700 credit scores.

Second, many builders gave $25,000 and more as “incentives” if they bought builders home, utilize the builders closing company and utilized the builders mortgage company, this was a disaster in the making. These home buyers were never told or “disclosed” that these “incentives or free upgrades” do nothing for the value of their home and the person buying the same home without the “incentives” and paying $25,000 less for the house was the smarter buyer because that is the real price of their home. Borrowers who received these so called free upgrades are effectively upside down.

Third, is it their fault that values in some areas have dropped 20% or more since they bought their home and now can not refinance into a better loan even with better credit? Is it their fault that the builders are now fire saleing their homes $50,000 and $150,000 less than what they were selling for just a year ago to move their inventory?

Last, individual states are beginning to make things more problematic. For instance, Nevada recently passed Assembly Bill 440 which will by some interpretations, makes it a felony in that state to sell stated income loans. Stated income loans do not require the borrower to provide income documentation. Nevada is a state where ones income is predominantly based upon tips and most workers on tips in the service industry do not claim a large portion as income. So many home buyers utilized stated income loans. Some lenders have shut off buying stated loans out of Nevada. Credit Suisse has stopped buying ANY home loans out of Nevada. Who wants to risk going to jail? Who will be hurt by this? The homeowner. The state has effectively put the home buyer at risk for worst case default and foreclosure.

My conclusion, There is no quick fix and unfortunately when dealing with the Federal Government and beauracy red tape, there may never be a fix. Just more debate about what to do. That’s what the Federal Government is good for, debating. I am one that is sitting on the fence. I see both sides. A simple fix would be to just modify primary residence loans and convert to a fixed for those borrowers who have not missed a mortgage payment before the adjustment. If they were investors or missed payments before the adjustment, disqualify them. It’s as simple as that. The first step is for lenders to help borrowers before they get into trouble when they call. This is a big issue. Lenders will not work with a borrower, often times until they get behind and once behind it’s typically too late.

To require more documentation, get rid of loan programs such as seconds, HELOC’s, stated income or “liar loans” is just adding fuel to the fire and discrediting a home buyer’s judgment. I personally do not need the government telling me what type of loan I should or should not get. There too much intervention by the government now. Lenders do not need to and should not wait for the government to pass laws and regulations. The mortgage industry needs to self regulate, show the government that we can take care of our own issues.

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