Matthew Mogul, Associate Editor at The Kiplinger Letter recently put up this excellent analysis of the current mortgage climate and the things the government can or can’t do:
Expect only limited help from the government as the subprime mortgage mess continues to take a heavy toll. Foreclosures are approaching record levels, and we expect more than 2 million families to lose their homes over the course of this year and the next as interest rates on adjustable rate mortgages reset higher and push the monthly payments out of reach.
That’s not to say regulators and government agencies won’t try. Though no big bailouts are on the way — for either homeowners or lenders holding troubled mortgage loans — government officials in Washington and at the state and local levels are pushing initiatives that will help stanch some of the bleeding.
“I haven’t seen one broad program that would put an end to this,” says Rick Sharga, vice president of marketing for RealtyTrac, a California-based group that tracks foreclosures. “What is heartening is there are a number of small programs that will help some people keep their homes. I think you’re going to see these small scale activities that will have an impact.”
State governments are doing the most, especially those that have been hit hardest. About 70% of all foreclosures are concentrated in seven states: Arizona, California, Florida, Georgia, Michigan, Ohio and Texas. In some locations, the troubles are tied to plant closures and layoffs, while in others, the culprit is speculative buying.
Aid is taking several forms: Many states are setting up hotlines that offer advice and even help homeowners bargain with lenders or assist with refinancing. Ohio has gone so far as to sell $500 million in bonds to establish a fund to help low-income homeowners refinance their mortgages, while state programs elsewhere offer loans to cover refinancing fees. Massachusetts will postpone foreclosures for up to 90 days to buy time for homeowners to try to work out problems.
Federal regulators and policymakers are also jumping in. The recent Federal Reserve move to cut interest rates is an example of this. The lower rates will help some homeowners with adjustable loans by limiting the hike in monthly payments they face.
Federal regulators also gave mortgage giants Fannie Mae and Freddie Mac permission to expand their investment portfolios by 2%. That frees them up to hold more mortgages, making it easier for banks and other home loan originators to resell their mortgages on the secondary market. Fannie and Freddie want more, insisting they need a 10% portfolio increase to help stressed homeowners, but that seems unlikely for now.
New banking guidelines issued by Washington should also help a little. They urge lenders to be more flexible and more proactive in spotting trouble early. In some instances they’ll recommend that homeowners seek nonprofit debt counseling, while in more dire cases lenders are encouraged to waive penalties or reduce prepayment fees that block refinancing.
Congress, meanwhile, is moving to thwart future problems. Legislation to modernize the Federal Housing Administration, cutting red tape and letting the agency handle more refinancings, will pass this year. The law will increase the size of mortgages the FHA can insure from $362,000 to $417,000. It’ll also lower down payments from 3% to 1.5% — and in some cases to zero.
A crackdown on predatory lending is also assured, with new regulations and legislation to increase disclosures and tighten subprime requirements. Expect extra legal protections for more subprime borrowers. There will also be bans on mortgages to consumers who don’t earn enough money to make monthly payments after low teaser rates have expired, as well as limits on prepayment penalties and low-documentation mortgages.
What should beleaguered homeowners do? Seek assistance early. Most loan officers will try to work something out to avoid foreclosure. It’s in their best interests to do so: A foreclosure will cost anywhere from 20% to 40% of the value of the mortgage, meaning it’s better for the lender to offer a struggling homeowner a loan modification. Lenders and mortgage servicers — those handling payments — have leeway even if loans were bundled up and sold off to big investors.
